3 ETFs I’d Buy And 3 I Want To Short

As anticipated, the Nasdaq Composite
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COMP |
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market into positive territory along with it, but low volume levels across the
board failed to confirm the rally. After a
sluggish start in the morning, the major indices rallied at mid-day, then
drifted modestly lower throughout the rest of the session. The Nasdaq Composite
posted a 0.5% gain, while both the S&P 500
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SPX |
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Average
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DJX |
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showed relative strength after last week’s correction and rallied 0.9%. The
mid-cap stocks of the S&P 400
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Total volume in the NYSE exchange fell 18% to 1.2 billion
shares, its lightest day of volume since the pre-holiday session of May 27. In
the Nasdaq, volume similarly was 16% below the previous day’s level. Yesterday
was the third day the Nasdaq has gained since August 3, but volume has declined
in each of those three days. Conversely, volume increased in three of the five
"down" days during that same period. Such a price to volume relationship is not
positive for the markets, but don’t forget that we are smack in the middle of
the annual "summer doldrums." The latter half of August is typically when a
majority of traders and investors take their summer vacations, so it was not
surprising that volume over the past several days has been below average levels.
Most likely, turnover will remain below average from now through the Labor Day
holiday on September 5.

The Semiconductor Index
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SOX |
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among the leading industry sectors yesterday. The Computer Hardware Index
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HWI |
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also moved 1.7% higher. On the downside, the Gold Index
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GOX |
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Service Index
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OSX |
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PowerRating), two recent market-leading sectors, both corrected by
1.1%. Lethargic volume resulted in a mixed performance for most of the other
sectors, as a majority closed near unchanged levels.

Looking at the daily chart of the major indices, the first
thing you will notice is that the Nasdaq Composite perfectly bounced off support
of its three and a half month uptrend line yesterday. The blue ascending line on
the daily chart below marks the lower channel support of the uptrend that began
with the low of April 29:

While the rally off its uptrend line was positive, the
Nasdaq’s gain was rather minimal, thanks in large part to the light volume.
Resistance of the 20-day moving average, combined with seasonal lack of
activity, makes it likely that choppy and indecisive action over the next week
is more probable than a quick and firm rally back above the 2,200 level to new
highs. Nevertheless, the Nasdaq remains healthy in the intermediate-term as long
as it holds above its 50-day moving average.

From a technical point of view, yesterday’s rally in the S&P
and Dow did not change anything. Both indices remain stuck in the middle of a
choppy, sideways range near their 20-day moving averages. We have drawn
horizontal lines on the daily charts below to mark the short-term support and
resistance levels that we are watching for a break out of their current ranges:

As long as the S&P and Dow remain confined to their ranges
illustrated above, we recommend avoiding trades in SPY
(
SPY |
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PowerRating) and
(
DIA |
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because you are likely to churn your account with small losses. Instead, focus
on sector ETFs that are showing relative strength or weakness to the broad
market because their trends will be more clearly defined. SMH (Semiconductor)
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SMH |
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PowerRating)
continues to act well, as it is holding above support of both its weekly uptrend
line and 50-day moving average. BBH (Biotech)
(
BBH |
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long entry, as it is consolidating near its four-year high. GLD (Gold Trust)
(
GLD |
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although it gaps a lot, still appears to be breaking out on its weekly chart. On
the short side, we continue to like both RTH (Retail)
(
RTH |
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PowerRating) and UTH
(Utilities)
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UTH |
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PowerRating), both of which we remain short because they appear to be
correcting in the short-term due to sector rotation. We also like the Home
Construction sector
(
HGX |
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PowerRating) on the short side, although there is not an ETF
that comprises that sector. Within this sector, the Morpheus Capital hedge fund
remains short RYL
(
RYL |
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PowerRating), LEN
(
LEN |
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PowerRating), and PHM
(
PHM |
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PowerRating), with stops above
their 20-day moving averages. Above all, don’t forget that cash is king,
especially when very light volume levels cause erratic and indecisive moves in
the broad market. Trade what you see, not what you
think!

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 .