ETFs showing signs of institutional buying

The S&P 500 built on the gains from
the previous day’s breakout, but selling pressure late in the afternoon wiped
out a majority of its intraday gain. As of 2:15 pm EST, the S&P 500
was trading 0.8% higher, but a negative reaction to the subsequent Fed Minutes
triggered weakness that reduced its closing gain to only 0.2%. Both the Dow
Jones Industrial Average and Nasdaq Composite followed similar intraday patterns
before finishing higher by 0.3% and 0.5% respectively. Small-cap stocks
continued to outperform, as the Russell 2000 Index cruised 0.9% higher. The S&P
Midcap 400 advanced 0.6%. Each of the major indices closed near the middle of
their intraday ranges.

Turnover in the Nasdaq was 6% higher than the previous day,
enabling the index to register its third straight day of accumulation. Total
volume in the NYSE, however, declined by less than 1%. Still, volume levels were
healthy overall and firmly above their 50-day averages. Market internals were
solid. In both exchanges, advancing volume exceeded declining volume by a ratio
of approximately 2 to 1.

Yesterday, we entered a new long position in the PowerShares
WilderHill Clean Energy
(
PBW |
Quote |
Chart |
News |
PowerRating). This ETF, which began showing strength when
the Democratic party won control of the U.S. House of Representatives and Senate
last week, is unique because it is comprised of a plethora of companies related
to the development and production of alternative energy sources (click
here to see the underlying stocks). The first thing that caught our
attention was that PBW had just broken out above resistance of a six-month
downtrend line. Even better, however, was that the breakout coincided with the
formation of the right shoulder of a chart pattern known as an “inverse
head and shoulders.” As you may recall, this chart pattern was the original
reason we began buying the StreetTRACKS Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating) in late October,
which we remain long with a substantial profit. We have illustrated the “inverse
head and shoulders” pattern on the daily chart of PBW below. The blue descending
line marks the prior downtrend, which should now act as the new support level.
Also notice the volume increase over the past two weeks, which shows signs of
institutional buying interest:

As for the details, we listed a predetermined trigger price
for entry above 18.16. We arrived at this price because we wanted confirmation
for PBW to first rally above resistance of its October 26 high of 18.09. PBW
triggered on the open, then trended steadily higher throughout the day. If PBW
clears its October 16 high of 18.43, three cents above yesterday’s close, it
should really begin to take off because that would represent a breakout above
the “neckline” of the “inverse head and shoulders” pattern. GLD, for example,
rallied four days in a row after breaking out above its “neckline” at the end of
last month. To guard against a failed breakout, we have a protective stop on PBW
just below the 50-day moving average, which is presently at 17.42. On the
upside, it will initially run into significant resistance of its 200-day moving
average around 19.13, but we have an ultimate target of 20.15. This target
represents a 50%

Fibonacci retracement of the entire downward move from the May high down to
the September low.

In addition to PBW and GLD, we remain positioned long in the
DB Commodity Index Trust
(
DBC |
Quote |
Chart |
News |
PowerRating) and short the iShares Cohen and Steers Realty
Majors
(
ICF |
Quote |
Chart |
News |
PowerRating). DBC is basically unchanged from our original entry point, but
we are noticing positive money flow and sector rotation back into commodities.
We originally sold short ICF because the Real Estate Index ($DJR) appeared to be
rolling over, but strength in the broad market is helping the sector to recover.
ICF is near our stop just above yesterday’s high, but we remain short for now.
Finally, we re-entered the U.S. Oil Fund
(
USO |
Quote |
Chart |
News |
PowerRating) yesterday, when it rallied
back above its three-day high and 20-day MA. Oil is sometimes an erratic and
choppy sector to trade, but we still love the risk/reward of this setup. With
this trade, our profit target (58.85) is nearly five times the amount of our
risk (stop at 51.83). With the newfound strength in commodities, USO should
easily be able to hold above its prior downtrend line.

Although the broad market locked in another session of gains
yesterday, momentum from the weakness into the close may carry into today’s
session. But with the Nasdaq closing higher in seven of the past eight sessions,
a modest price correction in that index would be neither surprising nor
unwelcome. Conversely, the S&P 500 is less extended than the Nasdaq and much
closer to lower channel support of its primary uptrend line. As such, new
positions in the S&P and Dow-related sectors may provide you with a better
risk/reward ratio than trying to buy the Nasdaq at current levels. Obviously,
all bets are off with new long entries if either the S&P or Dow were to break
support of their primary uptrend lines.

Open ETF positions: Long GLD, DBC,
USO, PBW, short ICF (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.)