Get ready, these 9 stocks are ready to move

The broad market feebly attempted to
rally throughout the first half of Tuesday’s session
,
but the bears handily took control in the afternoon, causing each of the major
indices to close sharply lower and on higher volume. The S&P 500
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shed
1.0%, the Dow Jones Industrials
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lost 0.9%, and the Nasdaq Composite
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fell 0.8%. Small and midcap stocks exhibited relative weakness, as the Russell
2000 and S&P 400
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indices both lost 1.0%. Each of the major indices
closed at their intraday lows, setting the tone for opening weakness in today’s
session.

Tuesday’s losses were significant because they corresponded
with a rise in total market volume. Volume in the NYSE increased by 13%, while
volume in the Nasdaq was 10% higher than the previous day’s level. The losses on
higher volume caused both the S&P and Nasdaq to clearly register another bearish
“distribution day,” a clear sign of institutional selling. It was the fourth day
of higher volume losses in the Nasdaq within the past month. The S&P has had
five “distribution days” during the same period. Market internals in the NYSE
were positive throughout most of the day, but turned quite negative during the
last ninety minutes of trading. Declining volume exceeded advancing volume by a
margin of 2.7 to 1 in the NYSE, but the ratio was only slightly negative in the
Nasdaq.

In Tuesday’s Wagner Daily, we pointed out how a
plethora of broad market indices and industry sectors had rallied up to
resistance of their downtrend lines that have been in place for the past one to
two months. As if right on cue, many of these sectors and indices reversed
yesterday and appear to be resuming their existing downtrends. Among many
others, one sector that reversed after perfectly running into its downtrend line
was the Home Construction Index ($DJUSHB), which the Morpheus Capital hedge fund
has been swinging on the short side for the past several months:



As you can see on the chart above, $DJUSHB has been in a
downtrend since the end of July. The index formed a short-term double bottom in
the second half of September and tried to rally just above support of its
200-day MA. However, overhead resistance of the 20 and 50-day MAs, as well as
the downtrend line, prevented the rally from making headway. After hitting
resistance of its downtrend line, the index got slammed and plummeted 4.2%
yesterday. Due to this relative weakness, we now expect the index to break
support of its September low, which would also result in a fall below the
200-day moving average. Such an occurrence would also result in a clear break of
the weekly uptrend that has been in place for the past several years. It seems
the party may be over for the huge gains in the home construction stocks.

There is not an ETF that specifically tracks the home
construction sector, but you may wish to build your own “synthetic” ETF by
shorting a basket of several leading stocks within the index. In no particular
order, some stocks to consider are:
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,
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,
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,
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,
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,
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,
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,
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, and
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. You will notice that
each of them have similar chart patterns. You may also want to keep an eye on
IYR and ICF, two exchange traded funds that track Real Estate Index Trusts (REITs).
Although not directly tied to the home construction sector, the REITs are
rolling over as well. We netted a multi-point gain on IYR last month and may
consider reshorting if it breaks support again.

Because each of the major indices demonstrated similar
weakness yesterday, it seems likely that the broad market will re-test its prior
lows over the next one to two weeks. To profit from this, you may also wish to
consider shorting one or several of the broad-based ETFs such as
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,
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,
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,
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, or
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. If unsure which one to short, your best bet
is to short the one showing the most relative weakness to the other indices. As
regular subscribers already know, we chose to enter a new short position in IWM
(iShares Russell 2000 Index) yesterday because it recovered the least of the
major indices during the past week’s rally. When a sector or index lags behind
on the way up, it is typically the one that will fall the hardest on the way
down. As such, we anticipate IWM outpacing the broad market on the downside if
the weakness continues.


Open ETF positions:

Long GLD and FXI, short IWM (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
.