Oil Service And Biotech ETFs Poised For Breakout

NOTE: Please click on the charts below to enlarge them if they do not appear clearly.

Creating an unusual mirror image of the previous day's action, yesterday's broad market strength nearly matched Tuesday's weakness. All of the major indices gained approximately 2% or more and finished at their intraday highs. The Nasdaq Composite cruised 2.5% higher, the S&P 500 rallied 2.2%, and the Dow Jones Industrial Average advanced 1.9%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 2.5% and 2.4% respectively. Despite whipsaw volatility that made it equally challenging for bulls and bears, the market's price action of the past two days was basically a wash. Each of the main stock market indexes finished yesterday within just a few points of Monday's closing prices.

Looking exclusively at intraday price action and closing percentage gains, yesterday was exactly the inverse of Tuesday. One difference, however, is that Tuesday's sell-off occurred on higher volume, while yesterday's gains occurred on essentially flat to lighter volume. In the NYSE, total volume was 5% below the previous day's level, but the Nasdaq volume managed to tick 1% higher. Although NYSE volume did not significantly recede, keep in mind that the previous day's losses occurred on volume increases of approximately 25% in both exchanges. Conversely, firmly higher volume across the board yesterday would have definitively made Wednesday's action more positive than Tuesday's was negative. Still, yesterday's adv/dec volume ratios were as overly bullish as Tuesday's were bearish.

One of the top-performing industry sector ETFs yesterday was the Oil Service HOLDR (OIH), which zoomed 3.5% higher. We initially pointed out the relative strength in this ETF when it broke out above its intermediate-term downtrend line a few days ago. Since then, it has been consolidating just below its 50-day MA, forming a mini "cup and handle" chart pattern. Yesterday's gain caused OIH to close just above its 50-day MA and right at a pivotal level of horizontal price resistance. As such, we plan to buy OIH if it breaks out above yesterday's high. The breakout level is illustrated on the daily chart below:

Another sector we're keeping an eye on is the Biotech Index ($BTK). The Biotech HOLDR (BBH), iShares Nasdaq Biotech (IBB), and the SPDR S&P Biotech (XBI) all showed incredible strength in the final hour of trading yesterday. Of the three, only XBI is near its 52-week high. However, both BBH and IBB are poised to break out above their weekly downtrend lines. If they do, we expect momentum to carry them higher in the short to intermediate-term. Below is the weekly chart of IBB:

In addition to Oil Service and Biotech, many of the International ETFs are now poised to move back above their 50-day moving averages and intermediate-term downtrend lines. The iPath India (INP) and iShares Emerging Markets (EEM) are two such examples. Both remain on our watchlist for potential long entry.

If the broad market's price action of the past two days is any kind of guide, it appears we may be entering another period of overall indecision. As such, we are shifting our short-term bias from negative to neutral. The intermediate-term trends of all the major indices remain "down," but the short-term trends could easily go either way from here. If the benchmark S&P 500 rallies above its August 24 high of 1,479, its intermediate-term downtrend will have been broken as well. That equates to an upward move of just over 1% from yesterday's closing price. Similarly, the Nasdaq Composite could easily break out of its intermediate-term downtrend by closing above its August 24 high of 2,576, just 0.5% above yesterday's close. It's also bullish that the Nasdaq seems to be finding support at its 200-day MA.

With the whipsaw conditions we've seen over the past two days, consider laying low with new position entries, at least until the market shows its hand more clearly. Overtrading your account in choppy markets is a guaranteed way of giving back hard-earned profits. To decrease your risk in the current environment, consider trading in specific industry sector ETFs, as opposed to the broad-based ETFs that tracks indexes such as the S&P and Nasdaq. Sectors with good relative strength, such as Oil Service, select International ETFs, and perhaps Biotech, will be less affected by the direction of the broad market. Temporarily reducing your share size for both long and short entries is another way of controlling risk in an indecisive environment.

Open ETF positions:


Long - TLT, DXD

Short - (none)




NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday e-mail alerts are also sent on as-needed basis.





Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. Wagner is currently working on this third book, scheduled for publication in early 2008.





For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.

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