If you trade semis, watch this…
It was a roller coaster
of a session in the broad market Thursday, as stocks sold off
significantly in the morning, rallied in the early afternoon, then drifted lower
into the final ninety minutes of trading. The major indices eventually finished
with divergent results and near the flat line. The Nasdaq Composite
(
COMP |
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PowerRating),
down 0.5% at its intraday low, concluded with a 0.1% gain, as did the S&P
Midcap 400 Index. But both the S&P 500
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SPX |
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PowerRating) and Dow Jones Industrial
Average
(
DJX |
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Russell 2000
(
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PowerRating) was unchanged. Later, we’ll look at the semiconductors.
A look “under the hood” at yesterday’s
volume levels showed a positive overall bias to the session. Total volume in the
NYSE declined by 2%, but volume in the Nasdaq was 8% higher than the previous
day’s level. This was positive considering that the S&P closed lower, but
the Nasdaq showed a gain. Healthy markets should have lower turnover on the down
days and higher volume on a majority of the up days. The Nasdaq’s advance on
higher volume gave the index another bullish “accumulation day”
yesterday. Market internals confirmed yesterday’s divergent price action as
well. Advancing volume in the Nasdaq exceeded declining volume by nearly 2 to 1,
but the volume ratio was marginally negative in the NYSE.
In yesterday’s Wagner Daily, we mentioned that
the Semiconductor Index
(
SOX |
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moving average, while the Biotech Index
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BTK |
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major support level. To our satisfaction, that is exactly what happened
yesterday. Of the major industry sectors we follow on a daily basis, the $SOX
tied with the Gold Index
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PowerRating) as the top performing sector yesterday. Both
industry indexes rallied 1.3%, causing the $SOX to close above its 50-day moving
average. Conversely, the worst performing sector yesterday was the $BTK index,
which fell 2.3% and broke support of its one-year weekly uptrend line.
The strength in the chip stocks caused our long
setup in the iShares Semiconductor
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IGW |
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for buy entry yesterday. Going into the session, our plan was to buy IGW on a
rally above its prior high from March 2. IGW traded above that March 2 high on
an intraday basis, but unfortunately closed three cents below the 52-week
closing high that was set on January 11. Nevertheless, we like the odds of IGW
breaking out to new highs from here because the ETF is showing good relative
strength to the actual $SOX index. This also marks the fifth attempt of IGW
breaking out of its range and each subsequent attempt increases the odds of an
eventual breakout. As the daily chart below illustrates, IGW should “make
it or break it” within the next few days. We are prepared to tighten our
stop quickly if the breakout fails:
The other highlight of yesterday’s ETF action was
the major weakness in the Biotech HOLDR
(
BBH |
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PowerRating), which plummeted after failing
to hold support at the 190 level. As subscribers may recall, we sold short BBH
on April 3, at a price of 192.51, when it closed below its 200-day moving
average. Our initial target was a test of the February 13 low, around the 187
area, which was achieved yesterday. Notice how quickly BBH dropped to support of
its prior low after it fell below horizontal price support at 190:
We covered two-thirds of our short position for
more than a 5-point gain when BBH hit its initial profit target yesterday, but
we are trailing a stop on the remaining shares in order to maximize our profit.
If BBH fails to hold at its February 13 low, the next major area of price
support is just below the 181 level.
The major divergence between the Semis and
Biotechs yesterday was a prime example of why we have been focusing on trading
specific industry sector ETFs instead of the broad-based ones. Being long the
Nasdaq 100 Index (QQQQ) would have resulted in a 0.4% gain yesterday, but the
profits were much larger if you were long any of the Semiconductor ETFs and/or
short the Biotech ETFs. But more important than the greater profit potential
from trading sector ETFs is the reduced risk of getting stopped out from choppy
and divergent broad market conditions. Throughout the past month, attempting to
ride a trend in SPY or most of the other broad-based ETFs would have only
resulted in frustration. Until the major indices make a convincing move in
either direction, our focus will remain on the specific industry sector ETFs
that are showing relative strength or weakness to the broad market.
Open ETF positions:
Long IGW and short (partial) BBH (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
.