BBH is showing the best price action

October 10, 2006
Deron Wagner

Stocks bounced back from the previous day’s
correction, as strength in the tech stocks helped the Nasdaq gain 0.5%
yesterday. The S&P 500 and Dow Jones Industrial Average both lagged
behind by closing only 0.1% higher, but small and mid-cap stocks kept pace
with the Nasdaq. Both the Russell 2000 and S&P Midcap 400 indices rallied
0.6%. The major indices were showing stronger gains throughout most of the
afternoon, but a modest wave of selling in the final hour of trading caused
many sectors to finish near the middle of their intraday ranges.

Due in
part to the Columbus Day holiday, volume in both exchanges came in at its
lightest levels in more than a month, marking the third consecutive day of
lower turnover. Total volume in the NYSE was 20% lighter than the previous
day’s level, while the volume level in the Nasdaq fell by 10%. The sharp
decline caused volume to come in well below average levels in both the NYSE
and Nasdaq. As such, we can not lend much credence to yesterday’s gains. The
Nasdaq Composite managed to finish at a new five-month high, but it was
essentially another consolidation day in both the S&P and Dow.

In
yesterday’s session, BBH surged 3 points higher and closed at its highest
level in nearly seven months. Presently, the position is showing a
marked-to-market gain of more than 5 points, but it has not yet reached our
upside price target. Just to refresh your mind, we are looking for a 76.4%
Fibonacci retracement of the downward move from the November 2005 down to the
May 2006 low. This equates to a price target around the $195 area. We are
trailing a stop along the way to protect our unrealized profit, but the
relative strength in BBH tells us there is probably a little more juice left
in this play. From an educational perspective, this setup has been a good
example of how strong the upward momentum can be when a stock or ETF finally
breaks out above a level of horizontal price resistance after numerous failed
attempts. When that break of resistance converges with a break of the 200-day
moving average, it generates even more momentum. Looking at the daily chart
below, notice how far BBH has rallied since breaking out above resistance less
than two weeks ago:

Our
other long position, XHB, is showing an unrealized gain of 4% since our
September 13 entry, but its price action has not been as positive. Like BBH,
the XHB setup was a reversal of a downtrend as well, but the subsequent upward
momentum has been lacking. This is likely due to the fact that the breakout
above resistance in XHB was not as clearly defined or as lengthy as it was
with BBH. Within the next day or two, XHB should test resistance of the high
of its recent consolidation, about 60 cents above yesterday’s close. If it
breaks out above the range, great, but if it stalls or deliberates, we will
sell the remainder of the position into strength. We already sold partial
shares of the position into strength more than a week ago, near the same price
level. The chart of XHB below shows how the position has been stuck in a
consolidation since our initial entry:

Our
remaining two positions, UTH short and SMH short, are both showing small
unrealized gains, but have been choppy since our entry points. Both have
merely been oscillating in a sideways range, but we are patiently waiting for
the bearish setups to follow through to the downside. As you may recall, we
shorted UTH after it broke support of its 50-day MA, then rallied back up and
probed above resistance of said moving average. So far, it is still showing a
“lower high” and closed yesterday back below its 50-day MA. We still expect
UTH to roll over from here and at least test its September low:

SMH
has been showing similar relative weakness to UTH since our entry, but has
been even choppier. Resistance of the 200-day MA remains overhead, but now the
50-day moving average is rising up and will soon provide support. We are no
longer feeling as confident about this setup as when we first entered, but we
must be patient to let the trade play itself out. With stops, we are of the
belief that the best policy is merely to “set it and forget it.” Having such a
mindset prevents you from worrying about every tick that goes against you.
After we pull the trigger and enter a trade, we know it will either be a win,
lose, or draw, but we don’t fret over the outcome of any individual trade. We
know that consistently profitable trading results from understanding the
“numbers game.” As long as your average winner is more than your average
loser, and your win percentage is around 50% or better, you will be
consistently profitable in the long-term.

As a
reminder, quarterly earnings season kicks into gear this week. Key reports to
watch are Genentech (DNA) and Alcoa (AA), both reporting today, Genzyme (GENZ)
and Costco (COST), both due Thursday, and General Electric (GE) on Friday.
Check the earnings calendar on your favorite financial website for a complete
list of earnings dates so that you are not caught off guard with any
positions.

Open ETF positions:

Long BBH, XHB, short UTH, SMH (regular subscribers to

The Wagner Daily receive detailed stop and target prices on open
positions and detailed setup information on new ETF trade entry prices.
Intraday e-mail alerts are also sent as needed.)

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 .

BBH is showing the best price action

BUY THE FEAR, SELL THE GREED

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