Here's how I'm trading the semis

After beginning the day with a substantial selloff during the first hour of trading, the major indices recovered most of their losses by mid-day. Stocks subsequently chopped around in a narrow range throughout the afternoon and the broad market eventually finished the day lower. The S&P 500 (SPX | Quote | Chart | News | PowerRating), Nasdaq Composite (COMP | Quote | Chart | News | PowerRating), and Dow Jones Industrial Average (DJX | Quote | Chart | News | PowerRating) each lost only 0.1% or less, but small and mid-cap stocks again showed the most relative weakness. The Russell 2000 Index fell 0.8%, while the S&P 400 Index dropped 0.5%. Because the small and mid-cap indices typically lead the market, it is negative that the Russell and S&P 400 have had several days in which they clearly underperformed the major indices within the past week.

Total volume in the NYSE increased by 1% yesterday, while turnover in the Nasdaq was similarly 2% higher than the previous day's level. Although the percentage increase in volume was small, it was enough to register a "distribution day" for both the S&P and Nasdaq yesterday. This increased the "distribution day" count to four days of institutional selling within the past four weeks. Considering that a majority of the recent "up" days have been on lower volume, the overall pattern of price to volume in recent weeks does not bode well for the short-term health of the markets. However, expect traders' real intentions to be masked by the light overall volume and erratic moves that usually accompany the holiday season.

Earlier this week, we mentioned that the Pharmaceutical sector (DRG | Quote | Chart | News | PowerRating) was beginning to show relative strength and signs of forming an intermediate-term bottom. Since then, the sector has acted quite well. It broke out above resistance of its 50-day moving average on December 13, added to the gains the following day, then consolidated near its highs on December 15. This bodes well for more potential gains in the sector next week. Take a look at (PPH | Quote | Chart | News | PowerRating) (Pharmaceutical HOLDR), which has a similar chart pattern to the index:

Looking at the chart above, notice that PPH is holding above its prior high from November 11. This is bullish because it indicates that a "higher high" is forming after the double bottom formed at the beginning of this month. We informed subscribers of our PPH long entry on December 14 and are now trailing a stop to maximize gains. Remember that this is a reversal play and not a new high. Therefore, we can't be too greedy on the upside. A realistic expectation would be for PPH to rally up to its 61.8% Fibonacci retracement, which happens to converge roughly with the 200-day MA near $71.70.

The Biotech Index (BTK | Quote | Chart | News | PowerRating) and Semiconductor Index (SOX | Quote | Chart | News | PowerRating), two integral components of the Nasdaq, are both consolidating nicely and should help the Nasdaq to hold steady. The $BTK has been trading in a narrow, sidways range for the past week and is less than 2% below its prior 52-week high. However, note that BBH (Biotech HOLDR) is actually showing relative weakness to the $BTK index due to a laggard Genentech (DNA | Quote | Chart | News | PowerRating) (PowerRating). For the $SOX, we need to see it continue to hold above the December 13 low of 496. If it does, the consolidation should lead to a breakout and new highs sometime next week. SMH has a similar chart pattern and is buyable on a breakout above the December 13 high.