Pharmaceuticals Continue Their Assualt While Oil Service Pulls Back

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

Despite three preceding days of distribution in the Nasdaq earlier in the week, the major indices leaped firmly higher in Friday's session. Continued relative strength in large-cap stocks enabled the Dow to power ahead with a 1.2% gain. The S&P 500 and Nasdaq Composite followed with gains of 0.9% and 0.8% respectively. Shaking off its recent relative weakness, the small-cap Russell 2000 matched the Dow's 1.2% advance. The S&P Midcap 400 was higher by 1.0%. All of the stock market's gains were the result of an upside opening gap, as stocks subsequently trended lower before recovering later in the afternoon.

Higher volume in the NYSE confirmed last Friday's gains, but the Nasdaq lacked the confirmation of better turnover. Total volume in the NYSE surged 18% above the previous day's level. The Nasdaq volume, however, saw an increase of less than 1%. In the NYSE, volume finally rose above its 50-day average level. It had been nearly three weeks since turnover came in above average. Market internals were also strong for a change. Advancing volume in the NYSE exceeded declining volume by a margin of nearly 4 to 1. The Nasdaq ratio was positive by 5 to 2.

Last Friday's strength caused the S&P to power ahead to another six-year high, while the Dow jumped to a fresh record high of nearly 13,000. Of the major stock market indexes, only the Nasdaq, a laggard since the recovery off the March lows, is still trading below its prior highs from February. The lesser known, though equally important, Russell 2000 is also stuck below its prior highs. As the chart below illustrates, the Nasdaq set a new closing high, but failed to penetrate resistance of its intraday high of February 22. Just a small rally today would do the trick:

Of all the industry sector ETFs we have discussed in recent days, the Semiconductor HOLDR (SMH) and Pharmaceutical HOLDR (PPH) may have the most bullish chart patterns. However, the difference is that SMH just broke out of a range, whereas we've been waiting for just a normal correction in PPH that would provide us with a good risk/reward for entry. As you can see, PPH has been on fire:

After closing higher in 13 of the last 14 days, one must conclude that PPH is due for a rest. Still, it has not yet shown any signs of lethargy. When it does, we plan to use the pullback as a chance to buy PPH with a positive risk/reward ratio. We'll keep stalking it for a potential entry this week. We are also considering SMH, although last Friday's action did not firmly confirm the recent breakout of its range.

On the downside, the Oil Service HOLDR (OIH) is one ETF that may be starting an intermediate-term correction. So far, OIH has only had a a short-term correction that has not been worth trading on the short side, but a break below its 20-day exponential moving average would probably lead to a more sustainable retracement off the highs. Notice how a break of the two-day low would also correlate to a break of the 20-day EMA:

In the April 20 issue of The Wagner Daily, we said, "If the S&P, Nasdaq, and Dow manage to blow off yesterday's bearishness and finish the week at their highs, it would demonstrate just how much the bulls remain in control." Obviously, that's what occurred. Frankly, I don't personally recall ever seeing the major indices rally so firmly after three consecutive days of distribution in the Nasdaq. Nevertheless, we will certainly respect the market's resiliency! Last Friday was monthly options expiration day, but it was not the quarterly "triple witching" day. As such, it would be difficult to say that the day's gains were purely the result of institutional manipulation of individual stocks to specific strike prices. The only thing clear is that very odd mixed signals are happening in the stock market right now! Whether or not a paradigm shift in underlying market sentiment is taking place remains to be seen, but the balance of power remains in the corner of the bulls.

Open ETF positions: Long GLD, short IYR (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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