Waiting for a pullback entry to develop in the Solar ETF “TAN” – The Wagner Daily 
Broad market averages followed up Tuesday’s impressive advance with a lighter volume consolidation day, with most averages trading in the top half of the prior day’s candle. Tech stocks were noticeably weaker, as the Nasdaq Composite tested the prior day’s low before bouncing into the close. The Dow Jones Industrial Average held on to a positive close with a 0.2% gain. The S&P 500 Index slipped 0.1%. The small cap Russell 2000 index shed 0.6%. Showing relative weakness on the day, both the Nasdaq Composite and S&P MidCap 400 gave back 0.8%.
Turnover eased on both exchanges. NYSE volume sank 18% off the prior day’s pace, while Nasdaq volume lagged by 5%. The market internals confirmed the light volume with mild readings. Declining volume just edged out advancing volume by a 1.3 to 1 margin on the NYSE. The Nasdaq ratio was slightly worse, but still very average with declining volume beating advancing volume by 2 to 1. Yesterday’s light volume consolidation was a positive day for the bulls, but we did notice a little more selling on the Nasdaq.
The recent strength in solar stocks has enabled the Guggenheim Solar ETF (TAN) to reverse its downtrend by setting a series of higher highs and higher lows on the daily chart below:
TAN recently broke through its 200-day moving average after a significant rally off the lows. TAN may need a week or two of rest before it is ready to resume its uptrend. We have two possible scenarios for entry. Scenario 1 calls for a pullback of 6-7% off the recent swing high to the 200-day MA, around the 8.15 – 8.20 level. Scenario 2 is a potential breakout entry from a tight-ranged consolidation that forms over the next few weeks somewhere in the 8.25 to 8.60 area. The price action should not return back below the rising 50-day MA for the setup to stay remain intact.
With so many ETFs extended, we are focused on locating low-risk pullback entries and or breakouts from tight continuation patterns. In the meantime we can examine a few sectors that are on the verge of reversing trend.
Although the current rally has already shown a nice pick up in breadth with expanding leadership, it could certainly benefit from a strong semiconductor sector. The HOLDRS Semiconductor (SMH) is finally trading back above the 200-day moving average after a false breakdown below support in late August. The strong reversal off the lows led to a downtrend line breakout in late September. The price action is currently forming a fairly tight range above the 200-day MA and the downtrend line. SMH can confirm the downtrend line break by clearing the highs of the current range. We look for SMH to hold above 27.00 while consolidating.
The recent strength in commodity based stocks has given the S&P 500 quite a boost over the past few weeks. The one big drag on this index has been the lagging performance of the financial sector. While the S&P 500 doesn’t need the financials to lead it higher, it certainly couldn’t hurt for this sector to put in some higher highs and lows (we won’t hold our breath). At the very least, the market should be in good shape as long as the financials avoid setting new lows. SPDRs Select Sector Financial (XLF) has bounced off a double bottom pattern and is consolidating between the 50-day and 200-day moving averages. Aside from the great relative strength in foreign banks (mostly South American), there isn’t much to do right now with this sector. This is only something to keep an eye on (do note waste money in a laggard sector while the market is in rally mode).
Remember, since Tuesday’s rally corresponded with significant technical breakout levels in the major indices, there is a good possibility stocks will now start working on another leg higher. Nevertheless, it’s imperative to see proper follow-through within the next several days. Furthermore, bear in mind the major indices still remain well below their highs of the year. Only a move above those highs would cause the broad market to enter into a new, dominant uptrend.
Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also 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. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to: deron@morpheustrading.com.
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