Pharmaceutical Holdr (PPH) Wakes Up

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

Stocks began the day on a negative note last Friday morning, but the bulls stepped in and reversed early losses. A surge in the final ninety minutes of trading pushed in the indices into the black and enabled the S&P 500 to close 0.3% higher. The Nasdaq Composite, small-cap Russell 2000, and the Dow Jones Industrial Average each advanced 0.5%. The S&P Midcap 400 gained 0.2%. All of the major indices finished at their intraday highs and their best levels since late February.

Last Friday's price action was similar to the previous day, as the stock market shook off early weakness and reversed to close higher. Unfortunately, however, turnover also declined for the second consecutive day. Total volume in the NYSE was 6% lower than the previous day's level, while volume in the Nasdaq decreased by 1%. Looking solely at the charts of the S&P, Nasdaq, and Dow, one would be impressed by the resilience the major stock market indexes have shown over the past several days. But a quick look "under the hood" shows that most of last week's gains were not confirmed by a bullish price to volume ratio. The Nasdaq Composite, for example, had three sessions of gains last week, but only one of those was on higher volume that indicated institutional accumulation. Conversely, one of the down days was a bearish "distribution day," while the other was indicative of "churning." In a healthy market, you should see a pattern of higher volume on many of the "up" days, as well as lighter volume on a majority of the "down" days. Nevertheless, it's impressive (and surprising) that the major indices have recovered all of their losses from the big slide on February 27 in just a six-week period.

The spot gold commodity finished the week strong, enabling our long position in the StreetTRACKS Gold Trust (GLD) to close near resistance of its prior highs from late February. Now that we have a nice unrealized gain on the position, we'll be closely monitoring its price action over the next few days in order to determine whether it is likely to correct at this resistance level or break out to a new high. Stops will also be trailed higher to lock in gains if necessary. If gold remains strong this week, another ETF you may want to consider is the Market Vectors Gold Miners (GDX).

Unlike GLD, which mirrors the price of spot gold, GDX is comprised of a basket of gold mining stocks. As such, it is not directly tied to the price of gold, although it obviously has a great bearing on its direction. Sometimes the gold mining stocks show relative strength to the gold commodity, while other times they lag behind the price of gold. Lately, it's been pretty much in sync with the price of gold. GDX finished last week at a pivotal resistance level that has stopped rally attempts four times within the past eight months. If, however, it breaks out above that level, GDX could see a lot of short-term upside momentum. As you can see on the weekly chart below, GDX finished last week at pivotal resistance in the $42.50 to $43 area. Watch for a confirmed breakout this week:

The Pharmaceutical HOLDR (PPH) has woken up and broke out to a new 3-year high last week. After nine straight days of gains, it is due for a short-term correction. However, there is suddenly a lot of momentum behind the Pharmaceutical stocks, so any pullback is likely to be met with firm institutional buying support. As such, we will be stalking PPH for a potential long entry when it corrects. Though it may not retrace much of its recent gains, we at least need to see some price consolidation ("correction by time") to build a base of support and allow the 10 and 20-day moving averages to catch up to the price. We'll be monitoring PPH behind the scenes this week and will report on any low-risk entry point that develops. Regular monthly subscribers will receive a real-time e-mail alert if the position is entered on an intraday gap down:

For nearly a month, volume in both exchanges has been coming in below 50-day average levels. When volume eventually spikes, the corresponding direction of the market that day will tell us a lot about the true intentions of the institutional traders. Since more than half of the market's average daily volume is the result of mutual funds, hedge funds, pension funds, and other institutions, the major indices nearly always follow the direction of their trading activity. Corporate earnings season kicks into high gear this week, which is likely to be the impetus for the return of institutional participation. Remember that whether companies exceed or miss their earnings expectations is irrelevant. The only thing that matters is the market's reaction to the reports.

Open ETF positions: Long GLD, TWM, short IYR, RTH (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)

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. For a free trial to the full version of The Wagner Daily or to learn about Deron's other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .

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