Tech ETFs Surge, Defensives Break Down

January 3, 2001
Loren Fleckenstein

The tech-focused exchange-traded funds
roared to life Wednesday after the Federal Reserve announced a half-point,
inter-meeting interest rate cut. The consumer-, cyclical- and finance-related
ETFs also had a great day while money fled the defensives.

The high volume levels accompanying
many of these sharp upside and downside price moves lends authority that we have
made a major turn in the market.

For my chart analysis on Wednesday’s
action in leading retail and financial charts, including cup-with-handle
breakouts, see my Trading
The News commentary.

The Biotech HOLDR
(
BBH |
Quote |
Chart |
News |
PowerRating) ended up
5.9%, but that wasn’t much to show for a wild price swing. There’s a real battle
being waged between supply and demand here. Notice also that the stock was
repulsed by its downtrend line. I have recently called attention to bearish
formation in the Amex Biotech Index in my Dec.
29 Following The Money commentary. Long traders should be wary when it
comes to biotech stocks or the Biotech HOLDR.

Exchange-traded funds combine traits
of stocks and mutual funds. Like mutual funds, an ETF represents diversified
ownership in a number of different stocks, reducing company-specific
risk. Like stocks, ETFs trade on exchanges, nearly all of them in fact trade on
the American Stock Exchange. They quote throughout the day, enabling
traders to take advantage of intraday price moves.

If you’re new exchange-traded funds,
be sure to visit TradingMarkets’ Knowledge Center,
dedicated to explaining the basics of trading and active investing in ETFs and
mutual funds. Just click on the Funds tab
near the top of this page, then click on the Knowledge
Center tab.Â

You also will find lessons on trading
exchange-traded funds in the Stocks Education area of TradingMarkets.com. In
particular, check out my three-part series on trading ETFs, starting with href=”/.site/stocks/education/strategies/05262000-6129.cfm”>Moving
Average Crossovers. I also recommend newcomers read my tutorial, href=”/.site/stocks/education/strategies/06272000-6815.cfm”>Trading
HOLDRs: Unique Opportunity And Risk.

All stocks and exchange-traded funds
are risky. In any new trade, reduce your risk by limiting your position size and
setting a protective price stop where you will sell your new buy or cover your
short in case the market turns against you. For an introduction to combining
price stops with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
you’ll find extensive lessons in the Money
Management area of TradingMarkets’ Stocks Education section.

Tech ETFs Surge, Defensives Break Down

BUY THE FEAR, SELL THE GREED

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