2 ETF’s ready to move

After two days of indecision and
mostly unchanged prices, the major indices followed through on the broad-based
correction that began on October 27. The Nasdaq Composite plummeted
1.4%, the S&P 500 lost 0.7%, and the Dow Jones Industrial Average declined 0.4%.
The S&P Midcap 400 fell 1.2%, while the small-cap Russell 2000 suffered a 1.9%
loss. After trending steadily lower throughout the entire session, each of the
indices also closed near their intraday lows.

Overall volume rose in both exchanges yesterday, causing both
the S&P and Nasdaq to register bearish “distribution days.” Both the NYSE and
Nasdaq saw 3% volume increases over the previous day’s levels. In the Nasdaq, it
was the fourth day of higher volume losses within the past month and the third
such “distribution day” in the S&P during the same period. As you may recall, we
labeled the October 31 price to volume action as bearish “churning” and
suggested it was a warning sign to the bulls. Therefore, it was not a big shock
that yesterday was a “distribution day” in both exchanges. Market internals were
pretty ugly yesterday. The Nasdaq advancing volume to declining volume ratio was
negative by a margin of nearly 5 to 1. In the NYSE, declining volume exceeded
advancing volume by approximately 7 to 2.

The StreetTRACKS Gold Trust (GLD) bucked the trend of the
broad market by zooming 2% higher yesterday. More importantly, the rally
confirmed its recent breakout above several key resistance levels:

Looking at the chart above, notice how GLD has closed firmly
above resistance of its prior downtrend line that had been in place for five
months (the descending purple line). The breakout also coincided with a move
above both its 200-day moving average (the orange line) and prior high from
September 28. In the

October 25 issue of The Wagner Daily, we illustrated how GLD was
forming a bullish chart pattern known as an inverse “head and shoulders.” We
subsequently bought a half position of GLD in that day’s session, then added to
it on October 30. So far, GLD is showing an unrealized gain of two points (3.6%)
and should continue to move higher in the intermediate-term. With both an
inverse and a regular “head and shoulders” pattern, the predicted price target
is equal to the distance from the top of the “head” to the “neckline.” In this
case, the top of the “head” is 55.55 and the “neckline” is right around 60 (the
dashed blue line). Therefore, a realistic upside price target is the 64.50 area
(4.5 points above the neckline at 60). In the short-term, GLD may correct a bit
lower, but all the prior resistance levels it just broke out above should now
act as the new support levels.

The Semiconductor Index ($SOX), which has been in a choppy,
sideways range for the past several days, resolved itself to the downside
yesterday. We sold short the Semiconductor HOLDR (SMH) on October 27 after it
began to come back down from a “lower high” that had formed below resistance of
the 200-day moving average. Yesterday, SMH closed right at the intraday low of
October 27 and closed only two cents above a major level of horizontal price
support:

Any further weakness in the $SOX today should cause SMH to
fall below the horizontal support illustrated above. If that happens, it will
undoubtedly weigh on the Nasdaq, and hence the entire broad market. We are
prepared to capitalize on such a move with our SMH short position that is
presently showing a 1.9% gain.

Yesterday morning, we mentioned that the major indices could
no longer be labeled “overbought,” but that further downside could easily still
occur. Yesterday’s losses pulled the S&P back down to support of its 20-day
moving average, while the Nasdaq Composite closed just below it. Since the
current uptrend began back in July, the 20-day moving average has perfectly
acted as support from which the major indices subsequently continued their
primary uptrends. As such, we will be closely monitoring the price action and
volume patterns of the market over the next several days in order to determine
if this will be the case once again.

Looking purely at the daily charts, one could easily surmise
that the current correction down to the 20-day moving averages in the S&P and
Nasdaq is no different than others over the past several months. But there is
one crucial, yet easily overlooked difference this time — poor performance of
leading stocks. In a healthy market, leading growth stocks will show relative
strength by retracing a smaller percentage than the broad market on the down
days. However, since the correction began on October 27, we have seen many
leading stocks such as Hittite Microwave (HITT) and Garmin (GRMN) completely
fall apart. Further, there have been many failed breakouts to new highs as well.
Clearly, these are not good signs, so we are against buying new long positions
right now until this scenario changes. Remember, though, that commodity and
currency ETFs are not directly tied to the stock market’s performance.

Open ETF positions:

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 .