Here is a setup just waiting to be triggered

The major indices followed up last week’s rebound
with an uneventful day of sideways consolidation near the previous
day’s highs. The S&P 500 traded in a very narrow three-point range throughout
the entire session and finished the day less than 0.1% lower. The Dow Jones
Industrial Average
(
DJX |
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PowerRating), which traded in an equally tight range, was
unchanged. Relative strength in the Software ($GSO) and Internet ($GIN) sectors
helped the Nasdaq Composite
(
COMP |
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PowerRating) to gain 0.3%. The Russell 2000 Smallcap
Index
(
RUT |
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PowerRating) showed similar resilience by closing 0.4% higher. Also of note
was the incredible strength of the Chinese tech stocks such as
(
NTES |
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PowerRating),
(
BIDU |
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PowerRating),
and
(
SOHU |
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PowerRating), which showed closing gains of 16%, 9%, and 7% respectively.
The MTG Stalk Sheet,
which focuses on individual stock plays as opposed to ETFs, netted a gain of
approximately 8 points on the NTES position that was entered last week.

Total volume in the NYSE declined by 1%, but volume in the Nasdaq was 6%
higher than the previous day’s level. The gains on higher volume enabled the
Nasdaq to register another “accumulation day,” albeit a marginal one. Given the
small percentage of both yesterday’s gain and the increase in turnover, heavy
institutional buying was not apparent across the board except for within a few
leading stocks. However, it was also positive that the S&P’s fractional loss did
not occur on higher volume, which would have indicated churning.

In yesterday’s Wagner Daily, we pointed out the relative strength in
(
PPH |
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PowerRating)
(Pharmaceutical HOLDR), which was nearing the breakout level of its five-year
downtrend line. As we were hoping to see, PPH continued to consolidate
yesterday, as it traded completely inside the previous day’s range. The longer
it consolidates, the greater the base of support it will build. We still like
the setup and are keeping it on our watchlist for entry today. Subscribers
should note the updated trigger price to buy PPH. We have also adjusted the
trigger price on the
(
IYR |
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PowerRating) (Real Estate Index Trust) short setup, which
continues to form the right shoulder of its bearish “head and shoulders” chart
pattern.
(
SMH |
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PowerRating) (Semiconductor HOLDR) again closed lower yesterday and has
now given back nearly all of its gain from the September 8 breakout. Because of
the relative weakness of Intel, it is good we made a judgement call to avoid
buying the SMH breakout last Thursday.

Another sector ETF worth putting on your watchlist is
(
OIH |
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PowerRating) (Oil Service
HOLDR). Needless to say, the high price of crude oil has fueled the strong
uptrend in OIH during the past eighteen months, and particularly since May of
2005. But even strong sectors eventually correct along the way up, even if only
for a short period of time. Confirmation of a price correction has not yet
occurred, but yesterday’s 2.6% drop in OIH caused it to close just above support
of its uptrend line. While we normally focus on buying pullbacks to an
uptrend line, the difference this time is that OIH failed to hold at a
subsequent “higher high” after its last correction. It also tried to break out
both on September 1 and 9, but failed to follow through both times. Therefore,
it appears that OIH may be running out of gas, at least in the short-term.
Confirmation of this would occur if OIH closes firmly below support of its daily
uptrend line, which is illustrated below:

Note that trying to predict a major top based on a correction of only several
days is very difficult and never prudent. However, decent profits can often be
made by shorting a short-term correction in a strong sector. If you decide to
short OIH, patience is required to wait for an actual closing price below the
uptrend line. Furthermore, don’t be greedy with your profit target because
support of the 50-day MA is at the 112.58 area. Only advanced traders should
consider this counter-trend trade that offers a potentially high reward, but
also high risk of reversal. As such, we are not listing the trade as an
“official” setup on our watchlist.

As for the broad market, nothing really changed since yesterday’s analysis.
The main thing to watch is the 1,245 resistance level on the S&P 500, which we
feel is likely to “make or break” the broad market’s direction in the
intermediate-term. Expect erratic action and volatility as this level is tested
within the next several days. Similarly, the Nasdaq Composite has horizontal
price resistance from its prior high of August 9, which is at the 2,185 level.
On the Dow, only a breakout above the 10,717 level would get us interested in
possibly buying DIA. Overall, we feel there are much better setups right now
within the individual industry sector ETFs as opposed to the broad market ETFs.

Open ETF positions:

Long GLD (regular subscribers to

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