Here are 2 ETFs I’m stalking

Total volume in the NYSE increased by 1% yesterday, while volume in the Nasdaq was 3% higher than the previous day’s level. Market internals were negative, but not a wide margin. In both exchanges, declining volume exceeded advancing volume by a ratio of just over 3 to 2. Although turnover only rose by a nominal amount yesterday, it was technically enough to result in the registration of bearish “distribution days” in both exchanges. It was the fourth day of institutional selling in both exchanges within the past four weeks, a quantity of “distribution days” that is high enough to warrant vigilance on the long side of the market. Like we mentioned several days ago, the abundance of days in which volume has exceeded average levels in recent weeks is indicative of “churning” because the broad market has failed to make significant price advances alongside of the increased turnover.

The two sector ETFs we have been stalking over the past several days, the
Regional Bank HOLDR
(
RKH |
Quote |
Chart |
News |
PowerRating) and the Utilities HOLDR
(
UTH |
Quote |
Chart |
News |
PowerRating), both showed relative strength to the broad market yesterday. UTH slid 0.3%, but it perfectly bounced off support of its prior downtrend line. The most basic tenet of technical analysis states that a prior resistance level becomes the new support level after that resistance is broken. As a good example of this, notice how yesterday’s low in UTH perfectly coincided with support of the prior downtrend line that it broke out above on May 2:

Because UTH did not yet trade above its 200-day
moving average, our trade setup to buy it did not yet trigger. However, regular subscribers will see that it remains on our
watch list going into today. Assuming the broad market holds up okay, there is a good possibility the sector will break out above the May 2 high within the next day or two.

Since breaking out to a new high on April 27, we have been stalking RKH for a potential long entry, but were waiting for it to settle into an area of support. Because the trading range of the past two days has been rather tight and in the upper half of the breakout’s range, we consider this to be bullish. As such, we anticipate a continuation of the breakout over the next one to two weeks. RKH opened nearly unchanged, drifted lower throughout the day, but recovered to close near its intraday high yesterday. This action caused a “hammer” candlestick to form on its daily chart, a bullish pattern that should lead to further upside over the next several days. Looking at the shorter-term hourly chart of RKH, notice how the retracement from the high to the low of the breakout has been less than 50%. This is a good sign because breakouts that retrace less than 50% of their move are more likely to resume the upward momentum. For a relatively “safe” entry, you might consider buying RKH
about 30 to 40 cents over yesterday’s high:

On the downside, advanced traders might consider selling short the Oil Index
(
XOI |
Quote |
Chart |
News |
PowerRating),
as it appears to be forming a “lower high” on its daily chart. Note, however,
that the Oil Service Index
(
OSX |
Quote |
Chart |
News |
PowerRating) is showing much more relative strength than
the XOI, which is comprised of oil refiners and producers instead. We sold short
(
XLE |
Quote |
Chart |
News |
PowerRating) (S&P Select Energy SPDR) yesterday when it fell below its prior day’s low, but we do not
recommend shorting the Oil Service HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating). Novice traders may wish to
pass on this trade idea because the oil-related shares often move rapidly and
gap a lot due to overnight changes in the price of crude. Also, because the XOI index is still near its all-time high, being able to quickly cut the loss on a breakout to a new high is crucial.

One sector that has been stuck in a very narrow trading range over the past two weeks is the Semiconductor Index
(
SOX |
Quote |
Chart |
News |
PowerRating). Because the SOX is so heavily weighted within the Nasdaq, its direction tends to lead the Nasdaq, and often the entire broad market. The fact that the SOX has not gone anywhere recently is certainly one of the reasons why the major indices just continue to chop around in no particular direction. The good news, however, is that we are likely to see a volatility expansion in the SOX within the next several days. The daily chart of the
SOX shows how the channel has been narrowing around the SOX during its
volatility contraction. Along with the tightening of the channel, convergence of
the 20 and 50-day
moving averages
should also force the SOX to soon show its hand:

It’s difficult to speculate which direction the SOX will actually go, so just be prepared for a swift move in either direction. The bullish side of the argument is that the S&P and Dow remain near multi-year highs and could easily break out, but the bearish argument is that the Nasdaq could break support and roll over at any moment. In each of the past three days, the Nasdaq has closed below its 50-day moving average, but has closed above its prior low at the 2,300 level. Continue watching the Nasdaq Composite closely, as it is sitting at a “make it or break it” inflection point that could move the whole broad market in either direction.

Short IYR and XLE (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.)