Keep An Eye On This Sector

A worse than expected earnings report
from Internet leader Google pressured stocks on Wednesday’s open, but
the broad market recovered to finish the day slightly higher. The Nasdaq
Composite
(
COMP |
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Chart |
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PowerRating), down as much as 0.6% intraday, reversed its opening
weakness to close with a 0.2% gain. The S&P 500 Index
(
SPX |
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PowerRating) did the same.
Strength in Boeing, which reported earnings before the open, helped the Dow
Jones Industrial Average to show relative strength for a change. The index
popped 0.8% and finished at its highest level since January 13. All three of the
major indices finished near their intraday highs, indicating institutional
support. The mid-cap S&P 400 eked out a 0.1% gain and the small-cap Russell 2000
advanced 0.3%. Both indices again closed at new all-time highs, the S&P 400
doing so for the fourth straight day!

Total volume in the NYSE decreased by 2%, but volume in the
Nasdaq was 1% higher than the previous day’s level. Market internals were
negative in the morning, but improved throughout the session. By day’s end,
advancing volume had exceeded declining volume by approximately 3 to 2 in both
the NYSE and Nasdaq. While the ratio was not extremely positive, the market’s
resiliency and ability to reverse its early losses was bullish.

One sector ETF worth keeping an eye on is the Biotech HOLDR
(
BBH |
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PowerRating).
Since March of 2005, BBH has been in a steady uptrend on its weekly chart, which
we have profited from several times along the way. In November of 2005, BBH
formed a peak and began to correct to the downside. Since then, BBH has been in
a steady downtrend on its daily chart, but the longer-term weekly chart still
looks pretty good. Strength in the Biotech Index
(
BTK |
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PowerRating) enabled BBH to break
out above its 7-day range and close at its 20-day moving average. The rally also
put BBH within striking distance of breaking its daily downtrend line, which now
converges with the 50-day moving average. When a trendline converges with a
major moving average, a break above or below that level usually generates a lot
of momentum. The daily chart below illustrates the downtrend line and moving
average convergence:

If BBH breaks out above the downtrend line illustrated above,
it will represent a low-risk entry point on the long side. Our first target
would then become the prior high from November, around the $212 area. Because
prior resistance becomes the new support after resistance is broken, a tight
stop could be kept just below the downtrend line. Of course, BBH has not broken
out yet, so buying at the current level is a bit risky. Nevertheless, you may
want to set an alert on your trading software so that you are aware when/if BBH
breaks out above its downtrend line and 50-day MA. PBE (PowerShares Biotech) and
IBB (iShares Biotech) are two similar ETFs to consider. While both PBE and IBB
have less overhead supply than BBH, we feel BBH presents a better overall
risk/reward ratio if it breaks out above its downtrend line.

As for the broad market, the same resistance levels we
illustrated in yesterday’s newsletter are applicable going into today. For the
S&P, the key resistance level is 1,285. Interestingly, the Nasdaq closed right
at resistance of its prior high, so today’s action is likely to cause the index
to either “make it or break it” in the short-term.

Open ETF positions: