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Semiconductor HOLDR Creeping Back Into Buy Territory
Stocks closed out the month of May in an uneventful manner, as the major indices oscillated in a choppy, sideways range throughout the day. Both the S&P 500 and Dow Jones Industrial Average finished flat, but the Nasdaq Composite showed relative strength by gaining 0.5%. The small-cap Russell 2000 also rallied 0.5%, while the S&P Midcap 400 advanced 0.6%. The leadership the Russell and Nasdaq began to display several days ago is a welcome change for the stock market. Formerly, both indices only spun their wheels and went nowhere fast as the S&P and Dow marched higher.
Total volume in both the NYSE and Nasdaq surged 20% above the previous day's levels. As such, the Nasdaq scored its second "accumulation day" in a row. The situation was less encouraging in the S&P and Dow. Higher volume without corresponding price gains is often indicative of bearish "churning" that is caused by institutional selling into strength. This is particularly true when such action appears within the context of an extended uptrend. Nevertheless, it was good that the S&P managed to hold at the new all-time high it set yesterday. Advancing volume in the Nasdaq beat declining volume by a solid margin of 2 to 1. The NYSE volume spread was marginally positive.
In the May 29 issue of The Wagner Daily, we explained how the Semiconductor Index ($SOX) was beginning to look bearish on its daily chart, but had also moved down to major support of its long-term uptrend on the weekly
chart. We also explained that the longer-term trend usually prevails whenever the shorter-term trend is conflicting in the opposite direction. Because of this, we have been on alert for a potential rally off the long-term uptrend line in the $SOX index. The biggest factor in the Nasdaq's relative strength yesterday was the 1.4% gain in the $SOX, which also moved back above its 50-day moving average that it fell below on May 24.
We bought the Semiconductor HOLDR (SMH) a few weeks ago when it pulled back to support of its 20-day EMA and appeared to be resuming its uptrend. The reversal attempt failed to hold, so we closed the position a few days later. We were a bit early on the first buy entry, but the setup now has a lot more going for it. Not only did SMH form a double bottom on May 24 and 30, but that pattern also coincided with a bounce off the pivotal 50-day moving average. It's bullish that SMH closed yesterday above the mid-point above its double bottom, as well as above its three-week downtrend line. We expect SMH to gap up above its 20-day EMA today, which should set it in motion for a recovery back to its prior high. We bought SMH about thirty minutes before yesterday's close: 
A $13 rise in the price of spot gold triggered an impressive rally in the Gold and Silver Index ($XAU) yesterday. Though it's been in a choppy, sloppy range for the past several weeks, the $XAU index appears to be waking up. The $XAU zoomed 2.7% higher yesterday, and also closed just above resistance of its intermediate-term downtrend line that began in mid-April. As you can see on the daily chart below, it also finished just below its 50-day moving average:
If the $XAU index follows through on yesterday's strength by convincingly breaking out above its 50-day MA, it may create some ETF buying opportunities within the sector. The well-known StreetTRACKS Gold Trust (GLD) is obviously one potential play, but it's important to note that the actual mining stocks have been outperforming the spot gold commodity. Therefore, consider a potential trade in the Market Vectors Gold Miners (GDX) instead. A rally above the $39.60 area in GDX would represent a break of its daily downtrend line, though its 50-day MA presently looms overhead at $40.13. Without confirmation of follow-up from yesterday's strength, it's may be a bit too early to begin accumulating shares of the gold-related ETFs. We simply wanted to give you an early heads-up on the sudden rotation into the sector that we noted.
Open ETF positions: Long SMH, FBT, short FXI (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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NOTE: Please click on the charts below to enlarge them if [read more]
NOTE: Please click on the charts below to enlarge them if [read more]
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