Bullish Setup in this Pharma ETF

Stocks showed a bit of optimism ahead
of today’s Fed announcement on economic policy, although turnover fell below
average levels. The S&P 500 broke its three-day losing streak by
posting a gain of 0.6%, as the Nasdaq Composite and Dow Jones Industrial Average
both advanced 0.3%. The small-cap Russell 2000 and S&P Midcap 400 indices each
rallied 0.6%, causing the latter to close at a fresh all-time high. Each of the
major indices finished near their intraday highs.

As we often see ahead of Fed days, volume tapered off in both
the NYSE and Nasdaq. Total volume in the NYSE declined by 1%, while volume in
the Nasdaq was 7% lower than the previous day’s level. It was the fourth
straight day of lower turnover in the Nasdaq, and also the lightest volume day
of the calendar year. Volume receded below 50-day average levels in both
exchanges, indicating traders and investors were waiting for today’s Fed
comments before making any big bets on the direction of the market.

One ETF that is setting up nicely for potential follow-through
on the long side is the Pharmaceutical HOLDR
(
PPH |
Quote |
Chart |
News |
PowerRating). On January 19,
PPH broke out to close at a new 52-week high, but it drifted back down into the
range the following day. However, rather than the breakout failing, PPH
subsequently began to consolidate in a tight range above its 20-day MA, just
below the breakout level. After finding support at the 78.70 area over the past
six days, PPH closed yesterday right at resistance of its short-term downtrend
line. This is illustrated on the daily chart of PPH below:

With the primary uptrend remaining intact and support being
established at the 78.70 area, PPH has a good chance of breaking out above its
short-term downtrend line in the next day or two. If it does, it should rapidly
zoom higher to at least test its January 19 high. If the broad market
remains solid, we would expect momentum to carry it to a fresh 52-week high. As
you can see, a rally above yesterday’s high is the basic entry point for buying
PPH, but it is safer to wait until after we see the market’s reaction to the
2:15 pm EST Fed announcement.

Until recently, the Biotech HOLDR
(
BBH |
Quote |
Chart |
News |
PowerRating), a cousin to PPH,
also had a nice chart pattern we were stalking for long entry. However, it
gapped down sharply on January 26 and failed to immediately recover. As such, we
no longer like the setup because the retracement was too sharp and it is now
trading below its 20-day MA. Notice how much overhead supply (resistance) BBH
must deal with in order to move back to its high:

Yesterday’s broad-based gains gave the S&P and Dow a little
more “wiggle room” above their 50-day MAs, but the Nasdaq Composite is just
waiting for the chance to have some resolution. The Nasdaq has touched its
50-day MA in seven of the past eight days, but has not moved far on either side
of it. So far, the 50-day MA has been acting like a magnet, but the market’s
reaction to the Fed announcement will likely to be the catalyst that enables the
index to make a decisive move away from the 50-MA. Be prepared for a swift move
in either direction this afternoon, and lay low with new positions ahead of the
Fed.

Open ETF positions:

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 .