As with the price action of the preceding several days, flat, lethargic trading was again the dominant theme yesterday. Stocks opened lower, recovered, then drifted in a in a very tight, sideways range throughout the remainder of the session. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all closed less than 0.1% from unchanged levels. The small-cap Russell 2000 eked out a whopping gain of 0.1%, as the S&P Midcap 400 edged lower by the same percentage. All the main stock market indexes closed near the middle of their narrow intraday ranges.
Total volume in the NYSE eased for the third straight day, this time by 8%. However, turnover in the Nasdaq was 6% higher than the previous day’s level. Since the Nasdaq was flat, the slightly higher volume was indicative of bearish “churning.” This occurs when an index is near a recent high, and volume picks up without a significant change in price. Nevertheless, trading in both exchanges remained below 50-day average levels. Historically, the last week of August is usually a slow one. Since the Labor Day holiday is not until September 7 this year, expect turnover to remain on the light side throughout next week as well.
Although the broad market has been stagnant this week, the Biotech Index ($BTK) has shown clear relative strength by zooming higher in an otherwise flat market. Yesterday, the $BTK Index closed 3.1% higher, after jumping as much as 5.8% at its intraday peak. It was also the seventh consecutive day of gains for the sector, whose bullish performance is currently being aided by takeover speculation amongst several individual stocks. If not already long the sector, the first substantial pullback of the $BTK Index could present an ideal buying opportunity. The daily chart of $BTK is shown below:
The Biotech HOLDR (BBH), iShares Nasdaq Biotech (IBB), and S&P Biotech SPDR (XBI) are three of the most popular ETFs that follow the biotech sector. PowerShares Biotech (PBE) is another, though its average daily volume is less than 100k shares. Presently, we’re already long a half position of iShares Nasdaq Biotech (IBB), which we bought when on August 12, after the $BTK Index pulled back after its first rally. Assuming the overall stock market holds up okay in the near-term, we may be looking to add the remaining shares of our IBB position at some point over the next week. You may also want to keep an eye on other healthcare ETFs, such as Pharmaceutical HOLDR (PPH) and S&P Health Care SPDR (XLV).
On August 21, the major indices broke out to close at fresh highs of the year. But since then, absolutely nothing has happened. Parity between the bulls and bears has caused the main stock market indexes to apathetically oscillate in a taut, horizontal range. Yesterday, the S&P 500 formed a “doji star” candlestick pattern, which occurs when the closing price is near the opening price, which is near the middle of the day’s range. This pattern is neither bullish nor bearish; rather, it is a sign of indecision or confusion:
The tight, sideways ranges over the past three days have caused a clearly defined area of short-term support and resistance levels to form. If any of the major indices close below their lows of the past three days, it will probably lead to another downside test of the 20-day exponential moving averages next week. Conversely, a convincing breakout above the highs of the past three days could lead to a resumption of last week’s strength. Like we said yesterday, we’re taking it easy with regard to any new ETF entries in the market right now, whether on the long or short side of the market.
Open ETF positions:
Long – IBB, DGP, VXX
Short – FXI
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 Trade Alerts are also sent via e-mail and/or mobile phone text message 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’s new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also 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 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.
