Here’s why it’s good to be long BBH

The broad market built on in its
newfound momentum yesterday morning, but the
bullish enthusiasm faded later in the day. Nevertheless, the major indices
registered another day of gains on higher volume. The S&P 500
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0.4%, the Dow Jones
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Russell 200
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The Nasdaq’s
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to the upside reversal in the Semiconductor Index, which has gained 4.9% within
the past two days and is back above its 200-day MA. However, unlike the prior
day in which the major indices all closed at their best levels of the session,
most stocks closed near the middle of their intraday ranges. Only a wave of
buying during the last thirty minutes prevented the broad market from closing at
its intraday low.

Total volume in the NYSE rose by 2% yesterday, while volume in
the Nasdaq was 6% higher than the previous day’s level. This gave the Nasdaq its
third bullish “accumulation day” within the past four sessions. Analyzing
yesterday’s volume levels in greater detail, you will notice that overall market
volume was higher during the morning rally than it was throughout the early
afternoon selloff. This, of course, is also positive. However, market internals
were only positive by a small margin, especially in the NYSE.

In yesterday’s Wagner Daily, we looked at a few
industry sectors that were showing potential entry points on the long side. The
Internet Index
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another 0.5% yesterday, its fifth consecutive day of gains. The US Home
Construction Index ($DJUSHB), which closed the previous day right at convergence
of its daily downtrend line and its 20 and 50-day moving averages, backed off
1.2% yesterday. However, one likely scenario is that the $DJUSHB index will
consolidate in a sideways range for another day or two and then break out above
the convergence of resistance levels. If it does, the upside momentum it
generates should be good for at least a week of gains in the sector. But be sure
to wait for confirmation of the breakout instead of buying in anticipation
because the downtrend that has been in place for the past three months could
just as easily resume from here.

Based on the detailed trade setup we presented subscribers to
yesterday morning, we are now long
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marked to market gain of nearly two points. Since recovering back above its
50-day moving average on October 31, BBH had been consolidating just below its
horizontal price resistance near the $197 level. Because it was also trading
within 4% of a multi-year high, we knew there was only a minimal amount of
overhead supply. As such, our plan was to buy BBH if/when it broke out above its
prior high and the horizontal price resistance near the $197 level. Fortunately,
it did exactly that yesterday and finished the day exactly one point below its
5-year high (the red horizontal line) yesterday. We bought BBH just over
$197.25, when it gapped and rallied above its prior high (the blue horizontal
line) on the chart below:

When an ETF is trading at or near a fresh multi-year high, we
don’t assign price targets because there is minimal or a complete lack of
overhead resistance. Therefore, our plan with BBH is to simply trail a stop in
order to maximize gains and protect profit along the way. There are many factors
you can use to determine where to trail your stop, but one of the simplest and
most effective indicators is to use the 10-day moving average (not shown
on the chart above). When a stock or ETF is trending well, the 10-day MA will
often act perfectly as support or resistance for the length of time frames we
generally target.

As for the broad-based indices, the Nasdaq Composite popped
well above resistance of its 3-month downtrend line yesterday. Because the index
closed near its prior high from October 4, we expect the index to consolidate
for a few days and then attempt to build on its gains. Any retracement should be
met with support of that prior downtrend line, which is roughly the same as the
high of November 2:

Also notable is that the Dow Jones Industrial Average finally
managed to close back above its 200-day MA yesterday. It was previously trading
below it for five weeks, so it is bullish for the broad market and retail
investor psychology if the index holds above it for more than a day or
two. The Dow is now above its downtrend line from the September 12 high, but it
is still below its long-term weekly downtrend from the March 2005 high (which we
illustrated a few days ago). Resistance of that weekly downtrend line is just
below the 10,600 level.

Open ETF positions: