All Eyes Watch This Key Area Of Resistance

After beginning the day with an opening gap lower,
the broad market quickly reversed and filled the gap, traded sideways for
several hours, then pushed into positive territory in the afternoon. The Nasdaq
Composite Index
(
COMP |
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S&P 500 and Dow Jones Industrial Average advanced 0.6%. The S&P 400 Midcap Index
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RUT |
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higher. Each of the major indices closed near their intraday highs as well. As
predicted, it was strength in the biotech and semiconductor sectors that led the
way higher in the broad market. The AMEX Biotechnology Index
(
BTK |
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PowerRating) cruised
1.6% higher, while the Philly Semiconductor Index ($SOX) rallied 1.2%.

Although yesterday’s gains offered a glimmer of hope to the bulls, it was
negative that the rally occurred on 2% lighter volume in the NYSE. Total volume
in the Nasdaq was less than 1% higher than the previous day’s level. Given that
it was the first solid reversal day since the broad market’s current selloff
began in early August, it would have been better to see an accompanying rise in
turnover. Such action would have indicated institutional support behind the
rally, but this was not the case. Instead, yesterday’s action seemed more
typical of just a technical bounce that was largely the result of some short
covering here and there. The real question is whether or not the market follows
through on yesterday’s gains. Doing so will surely require the return of
institutional accumulation because a lot of overhead supply has been created
from the recent losses.

Yesterday’s rally caused the Nasdaq to close right at resistance of its
50-day moving average, which it fell below three days prior. Obviously, all eyes
will be watching that key area of resistance going into today’s session because
a prompt recovery back above the 50-MA could pull the broad market higher as
well. However, even if the index manages to close above the 50-MA today,
resistance of the 20-day moving average looms overhead as well. The only major
support level to follow, for each of the major indices, is yesterday’s lows. As
such, you may want to stand back and wait for the market to show its next move
over the next several days instead of aggressively entering new positions here.
Doing so will prevent you from sitting through the volatility that usually
occurs near pivotal support or resistance levels. We have circled the 50 and
20-day MAs on the chart of the Nasdaq below:

Both the S&P 500
(
SPX |
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DJX |
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resistance of their 50-day moving averages overhead, although they could both
rally another day before coming into those levels. Further, remember that the
Dow is trading below its 200-day MA as well. This adds another very solid level
of resistance that is important to watch. Below are daily charts of both
indices:

Because of the obvious resistance levels in the broad market, we advise
against buying any of the broad-based ETFs here, although it is a good idea to
trail your stops lower if short them. On the long side, consider the Biotech
(
BBH |
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and Semiconductor
(
SMH |
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PowerRating) exchange traded funds, both of which have been
showing relative strength to the broad market all month. As we have been
discussing, sectors that don’t drop with the broad market are usually the first
ones to rally when the major indices do. That is why the $BTK and $SOX indexes
both outperformed the major indices by more than double. Beginning with BBH, you
will see that it began to break out above a three-week sideways consolidation
yesterday. We bought BBH a few days ago because we expected it would eventually
break out, but the broad market weakness stopped us out with a small loss.
Nevertheless, we would surely consider re-entering this ETF on the long side, as
a break out of consolidations near the highs could easily lead to new multi-year
highs here. Of course, this will only happen if the broad market cooperates a
bit:

SMH has been trading sideways as the broad market sold off the past few
weeks, so it’s not surprising that it bounced off support of its 50-day moving
average yesterday:

If SMH clears the August 24 high of 37.12, we could see a nice upward move in
this one. But your best bet overall is to remain positioned on both sides of the
market, short the weak sectors and long the strong ones, until the market shows
its hand from here.

Open ETF positions:

Short ICF and MDY (regular subscribers to

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