Energy ETFs back in focus

As we often see when the major
indices are out of sync with one another, yesterday was choppy and sloppy.
The major indices gapped down on the open, rallied into positive territory in
the first hour, then dropped back down to their intraday lows. Stocks recovered
off their lows and traded in a narrow, sideways range throughout the afternoon
before finishing modestly higher. The S&P 500 edged 0.1% higher, while both the
Nasdaq Composite and Dow Jones Industrial Average rallied 0.2%. The small-cap
Russell 2000 and S&P Midcap 400 indices each posted 0.5% gains. All of the
broad-based indexes closed in the upper third of their intraday ranges, but
getting there was a bit tricky.

Turnover was mixed yesterday. In the NYSE, total volume ticked
1% higher than the previous day’s level, but volume in the Nasdaq declined by
8%. Since the S&P gained only 0.1% on a mere 1% increase in volume, we can’t
really classify yesterday as a confirmed “accumulation day,” especially since
market internals were barely positive. In both exchanges, advancing volume
marginally exceeded declining volume by a ratio of only 1.1 to 1. Overall, we
view yesterday’s broad market action as an attempt to find support after the
previous two days of selling. The direction of today’s market trend will likely
have a significant bearing on whether or not the recent correction continues.

The Semiconductor Index ($SOX), which we discussed extensively
in yesterday’s newsletter, probed below support of its 50-day moving average
before closing right on it. The $SOX is now at a “make it or break it” level in
which it will either snap back off the 50-MA, or collapse below it. Obviously,
its outcome will have a major bearing on where the market goes from here. For
that reason, pay particularly close attention to how the $SOX behaves today:

One sector we haven’t discussed in a long time is Oil and Oil
Service. The last time we discussed the energy sector was more than a month ago,
when we covered our short position in the S&P Select Energy SPDR (XLE) for a
nice profit. Since then, most of the oil-related ETFs have been in a choppy
range, hence the lack of technical commentary, but that situation may be
changing. Crude oil futures rallied more than $3 per barrel yesterday, pulling
along most of the oil ETFs with it. More importantly, they are now at or have
just broken above their downtrend lines from the August highs. Per intraday
e-mail alert to subscribers, we bought the Oil Service HOLDR (OIH) as it broke
out above its 50-day moving average yesterday. The break of the 50-day MA also
coincided with a rally above its primary downtrend line. The trade is already
showing a gain of more than a point since our entry, but we believe it has quite
a bit more upside:

The 20-day moving average on OIH should now act firmly as
support, so a protective stop should not be much below that level. As for an
upside target, we expect momentum of the trendline break to carry OIH at least
to its 200-day moving average, presently at $142.36. Although several of the
oil-related ETFs are breaking out above their downtrend lines, the U.S Oil Fund
(USO) is one that should be avoided. There appears to be a divergence between
the price of crude oil and the oil-related stocks, with the former showing
significant relative weakness. Since USO roughly mirrors the price of crude oil,
it is showing relative weakness to OIH, XLE, and the other energy ETFs. Because
USO is still near its low, it is riskier to buy because we do not yet
have confirmation that a bottom has been formed:

In addition to OIH, XLE, and USO, there are a handful of other
energy-related ETFs to choose from. We suggest you compare the relative strength
in each of them in order to determine which one offers the best potential entry.
For a complete list of all the energy ETFs, consult the free
Morpheus
ETF Roundup.

Earnings season is in full swing, with Google (GOOG) being the
latest behemoth to announce its quarterly earnings result. After the close of
trading yesterday, GOOG proudly proclaimed that their latest quarterly profit
nearly doubled over the same quarter last year. Traders reacted positively,
sending shares of GOOG seven percent higher in after-hours trading. Because GOOG
is considered a market leader, the bullish reaction to their report could help
the Nasdaq today. However, the Nasdaq 100 futures were last seen trading only a
few points higher in the post-market. Three different Dow components are
scheduled to report their quarterly earnings today, so the blue-chip index could
be more volatile than usual. Today is also monthly options expiration day, which
often causes erratic price movement in the market.

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 .