These 2 ETFs are ready to rise

After continuing the four-day
consolidation throughout the first half of the session,
the major indices broke out at mid-day, but selling pressure later in the
afternoon caused the broad market to drift back down into the prior trading
range. Nevertheless, the S&P 500
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SPX |
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COMP |
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eked out gains of 0.2%, while the Dow Jones Industrial Average
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less than 0.1% higher. The S&P 400 Midcap Index
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Russell 2000
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RUT |
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the middle of their intraday ranges, positioning the broad market for further
indecision going into today.

Total volume in the NYSE increased by 14% yesterday, but
volume in the Nasdaq was only 1% higher than the previous day’s level. This
technically means that yesterday was a bullish “accumulation day” in both the
S&P and Nasdaq, though it was not exactly positive that both indices gave back
about half of their intraday gains. Advancing volume exceeded declining volume
by a ratio of approximately 3 to 2 in the NYSE, but the Nasdaq internals were
positive by only a small margin.

Taking a look at yesterday’s sector performance, you will see
that the Semiconductor Index
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SOX |
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50-day moving average for the first time since October 4. This, of course, is
positive for the Nasdaq, but the $SOX remains in “no-man’s land” because it is
still in the middle of its range from the October selloff. There are a handful
of individual semiconductor stocks that are consolidating near their highs and
looking good for long entry, but SMH, the most popular ETF that tracks the
Semiconductor sector, is not a buy setup at its current level. SMH could move
higher for a few more days, but resistance of its downtrend line from the August
2 high is only about one point above yesterday’s closing price of $35.71. The
weekly chart of SMH below shows how it found support at its 200-week MA last
month, but has resistance of its downtrend line from the August high. As you can
see, it is really in “no-man’s land” right now and should be left alone unless
only daytrading it:

Conversely,
(
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and is holding at its five-year high. The consolidation of the past several days
is bullish because it enables BBH to build a base of support from which it can
spring to new highs. Stocks and ETFs that are trading at 52-week highs generally
continue higher simply due to the lack of overhead supply. As such, we remain
long BBH with a marked to market gain of 4.8 points, but only intend to take the
profit when BBH eventually hits our trailing stop. Trying to guess how high an
ETF will go when it is sitting at a new high is a bad idea and usually results
in taking profits too early. Trailing a stop based on a trendline break helps to
maximize your profit while protecting your gain. Below is a daily chart of BBH:

In addition to Biotechs, the Gold and Silver Sector
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XAU |
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is once again looking bullish as well. After a modest correction from its
multi-year high in September, the $XAU index is now ready to resume its weekly
uptrend that has been in place since May 2005. The $XAU index surged 3.1% higher
yesterday after it rallied above convergence of its 20 and 50-day moving
averages. Yesterday’s closing price of 109.30 caused the index to finish right
at resistance of its daily downtrend line from the September 30 high:

Looking at the longer-term weekly chart of $XAU, you will see
that the primary uptrend line from the May low remains perfectly intact:

Based on the charts above, we like the idea of buying the gold
and silver sector at current levels. As you may recall, we netted a large profit
from our long position in
(
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looking for an entry in that ETF. Unfortunately, the chart of GLD is more choppy
and not as clear as that of the $XAU, but that is because GLD tracks the actual
price of spot gold and $XAU is based on the prices of gold and silver mining
stocks. The two usually trade in sync with each other, but not always.
Therefore, you may want to consider creating your own “synthetic ETF” for the
gold/silver mining sector by trading a basket of the leading individual stocks.
We feel the best looking charts in that sector include:
(
GLG |
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(
GFI |
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(
PDG |
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and
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SSRI |
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As for the broad market, it has now traded in a relatively
narrow, sideways range for the past five days. The longer a market consolidates
in a narrow range, the more powerful the move will be when it eventually comes,
but the big question is which direction will it go? It’s difficult to say due to
divergence among the major indices. As we have recently discussed, the Nasdaq
100 (and
(
QQQQ |
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S&P 400 Midcap Index technically remain in a downtrend. Both the S&P 500 and Dow
Jones Industrials also ran into resistance of their prior highs from September,
which counteracts the bullish looking Nasdaq charts. Rather than attempting to
place aggressive bets on the direction of the broad market, consider trading
individual sectors with relative strength or weakness instead. Biotech and Gold
looks good on the long side, while Home Construction and Energy (former market
leaders) are potential shorts.

Open ETF positions: