Utilities And Biotech Sectors Showing Relative Strength

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

Stocks followed through on the prior day's closing weakness, as the major indices gapped down on the open, then trended steadily lower throughout the day. The S&P 500 fell 1.3%, the Nasdaq Composite 1.0%, and the Dow Jones Industrial Average 0.9%. The small-cap Russell 2000 and S&P Midcap 400 indexes lost 1.4% and 1.1% respectively. Each of the main stock market indexes finished in the bottom third of its intraday range, but a small bounce in the final fifteen minutes of trading lifted lifted stocks off their worst levels.

Although the broad market has declined in six of the last seven sessions, the one bright spot is that the losses of the past two days both occurred on lighter volume. Total volume in the NYSE receded 1%, while volume in the Nasdaq registered 3% below the previous day's level. More losses on higher volume would have pointed to the continued presence of institutional selling, but downward pressure has eased slightly since the November 13 rally. Nevertheless, market internals worsened from the previous day. Declining volume in the NYSE exceeded advancing volume by 4 to 1. The Nasdaq ratio was negative by 3 to 1.

We've been discussing the relative strength within the Biotech Index ($BTK) over the past week. Leading stocks in the index have not broken out of their ranges, but they also have not sold off with the broad market. When the market eventually sees some buying interest, individual tickers in the sector such as UTHR, ONXX, CRL, and IVGN should be among the first stocks to break out to new highs. The $BTK index itself probed above resistance of both its 50-day MA and intermediate-term downtrend line yesterday, but reversed into the close. Still, watch for a potential breakout in the $BTK, which should lead to momentum trading opportunities in the Biotech ETFs such as the Biotech HOLDR (BBH). The daily chart of the $BTK index shows yesterday's breakout attempt:

Although the sector is not frequently discussed, the Utilities HOLDR (UTH) has been showing relative strength to the broad market. Since testing support of its 50-day MA a few days ago, UTH has been consolidating in a tight range, just below its 20-day EMA. A rally above yesterday's high will trigger a breakout above the three-week downtrend line, as well as its 20-day EMA. This is shown below:

Of our three open positions going into yesterday, we covered the Mexico Index (EWW) position that was sold short into the previous day's opening gap up. Though we initially intended to hold the trade longer, we made a judgment call to cover the trade for a quick gain of more than 2 points due to the current short-term indecision in the broad market. The bears clearly have the upper hand overall, but Tuesday's massive rally illustrates how easily short sellers can get squeezed if the timing for entry is incorrect. Being nimble by taking profits quickly on both long and short positions is not a bad way to manage the current trading environment.

With EWW closed, our two remaining positions are long the UltraShort Oil and Gas ProShares (DUG) and short the S&P Metals and Mining SPDR (XME). Both moved in the right direction yesterday and are now showing solid unrealized gains. DUG moved back towards the high of its short-term consolidation, as XME moved to the low of its recent range. If XME sees any further weakness in the coming days, it will break down below support of its 200-day MA. This is illustrated on the daily chart below:

Today is monthly options expiration day. As if the stock market has not been volatile enough lately, options expiration should make the afternoon even more interesting. The best plan of action today may be to simply focus on managing existing positions, rather than looking to enter anything new. After the weekend and options expiration have passed, we'll re-assess the market and potential setups for Monday. However, the Thanksgiving Day holiday next Thursday may put a damper on trading activity next week.

Open ETF positions:


Long - DUG

Short - XME




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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