Get ready to trade big moves in these 3 ETFs

Stocks attempted to rebound from
their recent losses on Friday, but the gains
were mild and volume declined. After beginning the day with an opening gap up,
the major indices promptly drifted lower during the first hour of trading, then
traded sideways in a tight and narrow range throughout the rest of the day. The
S&P 500
(
SPX |
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COMP |
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gained 0.3%, and the Dow Jones Industrials
(
DJX |
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smallcap Russell 2000 Index
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RUT |
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also was among the biggest losers last week. The midcap S&P 400 gained 0.4%.
Despite Friday’s recovery attempt, the major indices still sustained sizable
losses for the week. Small and midcap stocks suffered the most, as the Russell
2000 plummeted 3.5% and the S&P 400 fell 3.3%. The Nasdaq Composite lost 2.9%,
the S&P 500 2.7% and the Dow Jones Industrial Average 2.6%.

Total volume in the NYSE fell by 24% last Friday, while volume
in the Nasdaq was 31% lower than the previous day’s level. Volume in both
exchanges fell to below their 50-day average levels. Investors may have been
pleased to see the broad market halt its string of losses on Friday, but the
sharp drop in turnover across the board indicates that institutions made no
effort to jump back in the market. Analyzing the overall price to volume ratios
of last week, it certainly does not bode well for coming week. The S&P 500
closed lower and on higher volume in four of the past five sessions, but
the one “up” day was on much lighter volume. This pattern indicates an abundance
of institutional distribution currently taking place, which means that long
positions have a low chance of success in the current market.

Looking at the daily charts of the major indices, you will see
that Friday’s session was an “inside day” for each of them. This occurs when
both the intraday high and low is completely contained within the previous day’s
trading range. When this occurs in the midst of a downtrend, it usually leads to
continuation lower, just as an “inside day” during an uptrend is typically
bullish. Overall, Friday’s modest gains did little to change the technical
picture of the broad market indices since our last analysis. The S&P 500
finished the week below both its 200-day moving average and its prior weekly
uptrend line that we annotated in last Friday’s Wagner Daily. Conversely,
the Nasdaq is holding just above its 200-day MA and weekly uptrend line, but
closed below its prior low from September. We may begin to see the formation of
“bear flag” chart patterns on the major indices, but that would probably take a
few more days to develop. We’ll keep you posted if this occurs.

Analyzing the recent performance of most industry sectors, you
will see that many recent breakouts to new highs have failed. One such example
is in the Biotech Index
(
BTK |
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PowerRating). Take a look at the daily chart below:

As you can see, the $BTK broke out to a new multi-year high on
October 3, but the breakout promptly failed two days later. Not only did the $BTK
fall back down to its breakout point, but it quickly dropped to below support of
its prior consolidation from the September lows. In doing so, it also fell below
its 50-day moving average. When a breakout to new highs fails so quickly, it
traps the bulls who bought the breakout. In the process, a lot of overhead
supply is created that makes it difficult for the index to recover. Therefore,
it is unlikely that the $BTK index, or any other sector that has demonstrated
similar price action over the past week, will recover anytime soon. Looking at
the longer term weekly chart, you will notice that last week’s bearish action in
$BTK also caused the sector to close right on support of its uptrend line that
has been in place since the low of April:

Obviously, the Biotech Index is now at a critical “make it or
break it” level that will result in a big move in one direction or the other.
Numerous other sectors such as Oil and Utilities, both of which were recent
market leaders, have similar chart patterns.

Stay alert in the coming week because many sectors and ETFs
are at pivotal levels that could result in major volatility expansions. Until
stocks prove otherwise, your overall odds of success favor the short side of the
market right now. We view any moderate bounce as a low-risk opportunity to sell
short rather than buy new long positions. Only a rally above the daily downtrend
lines on the major indices would change our bias. We will continue trailing
stops to maximize profits on both our
(
IWM |
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(
GLD |
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positions. GLD closed at a new record high last Friday and is well positioned to
move higher in the coming week, especially considering that gold is often
considered a “safe haven” in weak markets. As a side note, be aware that
quarterly corporate earnings season begins next week, so pay attention to any
stocks you have that are reporting earnings.

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