BBH is setting up, here’s the trigger

Monday’s widely anticipated
announcement of Alan Greenspan’s successor triggered a broad-based rally,
as the major indices continued their wild volatility of the past week. After
beginning the day with an opening gap up, stocks showed weakness throughout the
first ninety minutes of yesterday’s session, but the subsequent announcement of
Benjamin Bernanke as new chief of the Federal Reserve Board promptly put traders
in a buying mood. Both the S&P 500
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gained 1.7%, while the Nasdaq
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Russell 2000
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gained 1.9%. Demonstrating bullish action, each of the major indices also closed
at their intraday highs.

Despite very solid gains in the stock market, total volume in
both exchanges came in lower than the previous day’s levels. Turnover in both
the Nasdaq and NYSE was 12% lighter, although volume exceeded average levels. It
would have been better to see the broad market gain on higher volume, as it did
last Wednesday’s, but at least market internals were very strong. In the NYSE,
advancing volume exceeded declining volume by nearly 7 to 1. The Nasdaq ratio
was a very positive 5 to 1.

As indicated by the positive market breadth, yesterday’s
buying spree was spread throughout stocks in every industry sector. Of the 24
major sectors we follow on a daily basis, not a single one of them closed in the
red! In the S&P, sectors that showed the most strength were Oil and Oil Service,
Utilities, Steel, and Home Construction. Strong Nasdaq sectors were Internet,
Software, and Biotechs. Semiconductors, in an unusual twist, lagged behind most
other sectors. Texas Instrument’s earnings report after yesterday’s close also
had a negative impact on the Semis in the after-hours market.

One of the few sector ETFs that is still near its highs and
looks good for potential long entry is
(
BBH |
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has been trading below its 50-day moving average since October 5, it is only 5%
below its 52-week high. Rather than selling off sharply as many sectors have
done over the past month, BBH has mostly corrected by time through a sideways
consolidation. BBH closed yesterday above its 20-day moving average and is now
poised to break out above its downtrend line that has been in place since
mid-September. Because the longer-term weekly chart still looks bullish, we
would consider buying BBH on a breakout of that downtrend line, which is
illustrated on the daily chart below:

BBH has shown relative strength to many other sectors, as well
as the major indices, during the market’s recent correction. On the weekly chart
below, notice how the retracement has been comparatively mild:

Yesterday’s gains could be construed as positive for the
markets, but the reality is that the major indices are continuing to show some
wild day to day volatility. The Dow, for example, has traded in an intraday
range of greater than 100 points in each of the past four sessions, but half of
those days were up and half were down. Obviously, this type of market action
makes it challenging for trend traders to realize a profit. Daytraders who
thrive on intraday volatility are likely doing well over the past week, but
swing traders such as ourselves profit the most when the market is trending
smoothly in either direction. When the broad market was clearly trending lower
throughout the first half of the month, we did quite well and locked in solid
profits on the short side. But the daily indecision of the past week has made it
difficult to predict the market’s direction for more than a few hours in
advance. Rather than getting chopped up and constantly changing our market bias,
we have simply reduced the number of open positions and the average share
size in order to reduce our overall risk.

If a new trend develops from here, we will be fully ready to
capitalize on it. But until earnings season has passed, we expect more of the
type of action we have seen over the past week. Volatility will also stay high
as the major indices start to rally into resistance of their daily downtrend
lines that have been in place for the past several months. There is no sense in
risking your hard-earned profits when indecision reigns supreme. If you’re a
daytrader, take advantage of this wide intraday volatility in the markets. If
you’re not, it would do you well to sit on your hands (or at least one of them).

Open ETF positions: