These 2 strong ETFs are set to go higher

The broad market trended higher throughout yesterday morning, but the bears arrived and spoiled the party in the afternoon. As such, each of the major indices finished the day lower as volume increased across the board. Small cap stocks saw the biggest losses, with the Russell 2000 Index losing 1.2% yesterday. The Nasdaq Composite shed 0.6%, the S&P
Midcap 400 lost 0.5%, and the S&P 500 fell 0.4%. After initially probing above its 10,720 resistance level we illustrated in yesterday’s Wagner Daily, the Dow Jones Industrials reversed to finish the day 0.1% lower.

Although yesterday’s losses were not that bad on a percentage basis, it is important to realize that shares fell on higher turnover in both exchanges. Total volume in the NYSE increased by 16%, while volume in the Nasdaq was 21% higher than the previous day’s level. The higher volume losses resulted in a bearish “distribution day” for both the S&P and Nasdaq. It was the Nasdaq’s first day of confirmed institutional selling in three weeks, but was the third “distribution day” for both exchanges within the past four weeks. Nevertheless, an occasional day of institutional selling within the context of a rally is normal and can usually be absorbed in a healthy market. However, a string of “distribution days” within the next one to two weeks would serve as a clear warning sign to the bulls. As always, we will continue to closely monitor the relationship between price and volume in order to determine what is really happening “under the hood” of the stock market.

Unlike most of the down days in the first half of this month, yesterday’s selloff even affected the strong industry sectors that have been leading the current rally. Sectors including Biotech, Internet, Semiconductors, and Financials all corrected significantly yesterday, while no individual sectors stood out as strong performers. The broad-based losses resulted in our
(
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PowerRating) (Biotech HOLDR) position hitting its tight trailing stop, but we locked in a gain of 8.55 points in the process. BBH still looks quite bullish on its daily and weekly charts, but it is likely to consolidate for a while before going much higher. As long as its uptrend remains intact, we will be stalking BBH
for a potential re-entry point over the next several weeks. The Gold and Silver
Mining Index
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PowerRating) dropped yesterday, but the price of Spot Gold (and our long position in
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PowerRating)) held up well.

Taking an updated look at the daily chart of the S&P 500, you will see that the index reversed yesterday after running into resistance of its primary downtrend line from the high of August 3. As you may recall, the S&P recently broke out above its steeper, shorter-term downtrend line from its September 12 high, but the downtrend line that begins with its 52-week high is more significant because it has been in place longer. Looking at the chart below, you will see two separate downtrend lines. The blue one marks prior resistance (new support) of a downtrend the index rallied above earlier this month, but the red downtrend line shows the current resistance level that SPY traders are closely watching right now. We removed the moving averages so that you can see the trendlines more easily:

There is a good chance the primary, three-month downtrend line will continue to act as resistance from here and will likely result in either a correction by price (retracement) or correction by time (sideways consolidation). If the former occurs, expect the S&P to find support at its prior downtrend line from the September 12 high because prior resistance always becomes the new support after the resistance is broken. This would make the 1,200 level a key support area from which you could consider covering any new short positions and possibly re-entering the long side of the market. But if the index trades sideways instead, it would be more bullish than a price retracement and would probably result in a breakout to a new 52-week high within the coming months. Either way, use caution on new trade entries while the S&P 500 remains at such a pivotal level. As we showed you yesterday, the Dow Jones is at an equally pivotal level due to major horizontal price resistance at the 10,720 level. For the long side, the Nasdaq 100 Index (and QQQQ) continues to have the best chart pattern of the major indices and is still holding near its 52-week high.

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Long GLD (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)

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. For a free trial to the full version of The Wagner Daily or to learn about Deron’s other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com