Keep an eye on the BBH today
Stocks oscillated in a relatively narrow and
choppy range before finishing yesterday flat to modestly higher. The major
indices built on their recent gains in the morning session, but sellers arrived
in the afternoon and reversed the early strength. A bounce during the final
thirty minutes of trading lifted the indices off their intraday lows. The S&P
500 was unchanged, the NASDAQ Composite ticked 0.1% higher, and the Dow Jones
Industrial Average gained 0.2%. Small and mid-cap stocks showed a bit of
relative strength, as the Russell 2000 rallied 0.4% and the S&P Midcap 400 0.3%.
Total volume in both exchanges was 1% higher than
the previous day’s levels. Technically, the gains on higher volume gave the
NASDAQ its third straight “accumulation day,” but a 0.1% gain on 1% higher
volume was hardly enough to label it a session of institutional buying. Because
yesterday was basically a session of sideways consolidation, it actually would
have been much better if volume had declined instead of increased. When stocks
trade in a sideways holding pattern, lower volume is a healthy sign that the
bulls are taking a break and the sellers are staying away as well. However, if
volume increases without a corresponding rise in price gains, it often indicates
“churning” that is indicative of institutional selling into strength. This did
not seem to be the case yesterday, but it is something to be on guard against,
especially if volume rises again today without any corresponding gains.
One ETF that just broke out of a long base of
consolidation was the Biotech HOLDR
(
BBH |
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PowerRating), which surged 2.7% yesterday. We
have not discussed BBH for many months because it has been in a choppy, sideways
range since April of this year. But it busted through a major area of horizontal
price resistance and its 200-day moving average yesterday. Looking at the
daily chart below, notice how BBH finally broke out above the 182 level, an area
that stopped previous rally attempts numerous times over the past six months:
The longer a stock or ETF has been in a sideways
range, the more explosive the move will be when the break out eventually occurs.
Therefore, we expect BBH to trend steadily higher over the next several weeks.
For a low-risk entry point on the long side, we would either want to see a price
retracement of about one-third of yesterday’s range or a sideways consolidation
for another day or two. If it consolidates, we would buy the first breakout
above the high of the consolidation on an hourly chart. On the other hand, if it
gaps up and immediately rallies today, we will not chase an entry on the
long side. If we get a proper entry in BBH, our initial stop would be near
yesterday’s low, just below the 200-day MA. An initial target would be the $195
area, which equates to a 76.4% Fibonacci retracement of the entire move down
from its all-time high.
As for the broad market, both the S&P and Dow
have held at fresh multi-year highs for the past two days. The Dow is also less
than one hundred points away from its all-time high. It certainly has
made quite a stealth recovery off its July low. The biggest problem holding down
the NASDAQ has been the relative weakness in the Semiconductor Index
(
SOX |
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PowerRating),
which became notable more than a week ago. Yesterday, for example, the $SOX lost
0.7% while the NASDAQ gained 0.1%. If the $SOX gets in gear, it could easily
propel the NASDAQ back up to its 52-week high as well, but for now the index
remains 5% below it. The new highs in the S&P and Dow are definitely devoid of
any overhead supply that could act as resistance, but history has shown us that
rallies that are not led by the NASDAQ are often short-lived. For that reason,
our overall market bias remains mostly neutral in the short-term.
Open ETF positions:
Long
(
XHB |
Quote |
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News |
PowerRating), short
(
SMH |
Quote |
Chart |
News |
PowerRating) (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.