New short position added

Bullish momentum from the S&P and
Dow’s recent breakouts to new multi-year highs continued yesterday,
enabling the major indices to post their fourth consecutive day of gains. Though
most stocks traded within their previous day’s ranges, the broad market
recovered from mid-day weakness to finish higher and near its best level of the
session. The S&P 500 gained 0.2%, while both the Nasdaq Composite
(
COMP |
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PowerRating)
and Dow Jones Industrial Average
(
DJX |
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PowerRating) advanced 0.3%. The S&P Midcap 400
managed to rally 0.1%, but the small-cap Russell 2000 was unchanged.

Volume in the Nasdaq came in 9% lighter than the previous
day’s level and total volume in the NYSE declined by 13%. The ease in turnover
caused the NYSE volume to fall below its 50-day average level, but Nasdaq volume
remained above average for the fourth straight session. Looking at market
internals, advancing volume in the NYSE was nearly the same as declining volume
yesterday. The Nasdaq ratio was positive by less than a 3 to 2 ratio.

During yesterday’s session, we sent two different intraday
e-mail alerts informing subscribers of new ETF trade entries. The first was a
long position in the Biotech HOLDR (BBH), which we analyzed in detail yesterday.
As anticipated, BBH retraced just over one-third of the previous day’s range
yesterday morning, providing a low-risk entry point for new long positions. It
subsequently acted well throughout the remainder of the day and is presently
showing a small marked to market profit.

In addition to BBH, we also entered a new short position in
the Utilities HOLDR
(
UTH |
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PowerRating). The DJ Utilities Average
(
DJU |
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PowerRating), which UTH
follows closely, suffered from a failed breakout in the end of August. Its
inability to sustain its breakout to a new all-time high led to a rapid reversal
of momentum. From September 1 through 22, the index fell 4.6% from its high and
closed lower in 13 of 15 trading sessions. As you may recall, we netted a solid
profit in the S&P Select Utilities SPDR
(
XLU |
Quote |
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News |
PowerRating) throughout the decline.
Because it began to appear a bit “oversold,” we took profits by closing our
short positions in the Utilities sector last week and decided to wait for the
next bounce to re-short. The correction off the lows came right on time, as the
index began to recover on September 25. In the first three days of this week,
the $DJU bounced nicely, right up to resistance of its 61.8% Fibonacci
retracement. It also rallied back into resistance of its 50-day moving average.
Not surprisingly, it began to head back down yesterday:

Because the steady selloff throughout the first three weeks of
September left a lot of overhead supply in its wake, the $DJU rally into the
61.8% Fibo retracement and 50-day moving average provided a low-risk re-entry
point on the short side. As such, we sold short the Utilities HOLDR (UTH)
yesterday, with a stop over the September 1 high. Several other Utilities ETFs
are just as viable alternatives to UTH. For a complete list of the Utilities
ETFs, download our free

Morpheus ETF Roundup.

The broad market remains impressively resilient, but, as it
often does, divergence between the major indices may soon lead to choppy and
indecisive trading. The Dow probed above its all-time high yesterday and
finished just a few points below it. But the Nasdaq Composite continues to trade
well off its 52-week high. A handful of industry sectors are breaking out to the
upside, but several are also setting “lower highs” and are poised to roll back
over. For this reason, we are simultaneously long and short four different ETFs.
Note that today is also the last business day of the month and the
calendar quarter. As such, we may see a bit of institutional “window dressing”
that occurs when fund managers attempt to make their portfolios look good
through buying the best performing stocks and ETFs of the quarter.

Open ETF positions:

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