Are you looking to buy the SMH? Here’s something even better…

September 9, 2005
Deron Wagner

Total volume in the NYSE declined by 6% yesterday, but
turnover in the Nasdaq was 6% higher than the previous day’s level. This means
the Nasdaq technically sustained another “distribution day,” the fifth such day
of institutional selling within the past four weeks. Conversely, the Nasdaq has
had only two “accumulation days” of institutional buying during that same
period. Nasdaq market internals had an unusual divergence yesterday. Declining
stocks exceeded advancing stocks by a margin of 3 to 2, but advancing volume in
the Nasdaq marginally outpaced declining volume. This tells us that more stocks
closed lower than higher, but the ones that closed higher did so on much higher
volume. Most likely, the concentrated relative strength within the Semiconductor
sector accounted for this. In the NYSE, market internals were negative across
the board.

Divergence within the industry sector groups yesterday was
rather interesting. As previously mentioned, the $SOX index managed to gain more
than 1% despite broad-based weakness in the major indices. In the September 7
issue of The Wagner Daily, we displayed an annotated chart of
(
SMH |
Quote |
Chart |
News |
PowerRating)
(Semiconductor HOLDR) and explained that we anticipated an upside breakout of
the sideways consolidation. That breakout came yesterday, but we made a judgment
call to not buy SMH because the Semiconductor sector was pretty much
rallying on its own. While it is certainly possible for a sector to trade in the
opposite direction of the broad market for a short period of time, it is always
higher risk when at least a few other sectors are not confirming the move. Even
strong sectors will eventually reverse if the broad market does not confirm the
move. For that reason, we passed on buying SMH, at least for now. SMH closed
only about 30 cents above our original entry point, so it is still within buying
range if it follows through within the next few days.

Also of interest was the Gold Mining sector
(
GOX |
Quote |
Chart |
News |
PowerRating), which
rallied 1.9% and closed at a new 6-month high yesterday.
(
GLD |
Quote |
Chart |
News |
PowerRating) (Gold Trust),
which we are already long, rallied in sync with the mining stocks and closed at
a new high of the year. The blue horizontal line on the weekly chart of $GOX
below illustrates how the index is nearing the breakout level to a new 52-week
high. As such, we are anticipating a similar upward move in GLD over the next
several weeks:

Yesterday’s correction in the S&P 500 caused the index to drop
down to new support of its prior downtrend line that was broken on September 6.
Remember that a prior area of resistance becomes the new area of support after
the resistance is broken. As such, the S&P should find support at this
prior downtrend line. But if it does not, odds are good the S&P will fall back
down to its 50-day moving average. The descending blue line on the daily chart
below illustrates support of the prior downtrend line:

The Nasdaq Composite still has not rallied beyond the 50%
Fibonacci retracement from its August high down to the August low. It is also
sitting only 1% above its 50-day moving average. Whether or not the $SOX follows
through to the upside is likely to be a determining factor for the next
direction of the Nasdaq. The Fibonacci retracement lines on the daily chart
below show that the Nasdaq still has a lot of overhead resistance to contend
with:

Finally, keep a close eye on the performance of both MDY (S&P
400) and IWM (Russell 2000) over the next several days. The mid-caps of the S&P
400 and small-caps of the Russell 2000 were largely responsible for leading the
market higher throughout the first half of the year, but both indices have begun
to show relative weakness as of late. If that trend continues, it is unlikely
the S&P and Nasdaq will go very far in the intermediate-term.

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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
The Wagner Daily or to learn about Deron’s other services, visit
morpheustrading.com or send an e-mail
to

deron@morpheustrading.com .

Are you looking to buy the SMH? Here’s something even better…

BUY THE FEAR, SELL THE GREED

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