3 ETFs poised to go higher

Strength in the tech stocks enabled the Nasdaq to lead a
broad-based rally yesterday, but lower volume levels in both exchanges failed to
confirm the follow-through. The Nasdaq Composite, aided by a 2.3% gain in the
Semiconductor Index, trended steadily higher throughout the session before
finishing with a solid 1.9% gain. The S&P 500 and the Dow Jones Industrial
Average both lagged behind, closing higher by 1.2% and 0.8% respectively. Small
cap stocks showed relative strength for the second consecutive day, as the
Russell 2000 Index jumped 2.2%. The S&P Midcap 400 rallied 1.5%. Each of the
major indices closed at their intraday highs.

Yesterday’s gain in the Nasdaq was certainly a positive way to start the new
month, but one problem is that total volume was 4% lighter than the previous
day’s level. In the NYSE, total volume declined by 15%. Given that the Nasdaq
posted such a large percentage gain, higher volume should have also accompanied
the rise, as it would have confirmed that institutions were behind the move.
Instead, turnover fell across the board and was only on par with average volume
levels. Nevertheless, market internals were pretty good. In the Nasdaq,
advancing volume exceeded declining volume by a margin of 3 to 1, while the NYSE
ratio was positive by 5 to 1.

For the first time since the broad market selloff began on May 11, a handful of
individual stocks broke out above their bases of consolidation yesterday. More
than 100 stocks also posted new 52-week highs, another sign that pockets of
strength were abound. However, the charts of the major indices and individual
industry sectors show that we are definitely not “out of the woods” yet. Looking
forward, the biggest challenge will be the Nasdaq’s overhead resistance of its
moving average.
As you can see on the daily chart below, the index will likely test resistance
of its 200-MA in today’s session:

A lot of overhead supply was created by the Nasdaq’s massive slide last month
and, as such, it is likely to have a bit of difficulty at recovering back above
its 200-day
moving average.
Also, despite yesterday’s 1.9% gain, the Nasdaq only closed at its 38.2%
Fibonacci retracement of its most recent downward move. For this reason, we
can’t get too excited about the Nasdaq right now, although there are a few
individual stocks that may stealthily advance even if the Nasdaq goes sideways.

The S&P 500 has now retraced 50% of its slide, but closed right at resistance of
its prior low from April. Resistance of the 20-day moving average is also right
overhead. The dashed horizontal blue line on the daily chart below marks the
prior low from April:

Although individual stock traders may now find a few opportunities on the long
side, our overall bias on the equities ETFs remains negative until the major
indices prove they can recover above some key resistance levels. More
importantly, we need to see confirmation that institutional accumulation has
returned, something that has been lacking throughout most of the broad market’s
recovery off the lows. The Biotech HOLDR
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, which we discussed in
yesterday’s newsletter, broke out above its 50-day MA and is one exception that
may find a bit of upside follow-through. Also keep an eye on the Utilities
sector; both the S&P Select Utilities SPDR
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and the Utilities HOLDR
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are poised to rally above their prior highs, though both are below their 52-week

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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
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