Potential Setups in GDX and FXE

Stocks surged higher out of the
starting gate yesterday morning, racking up sizeable gains within the first
thirty minutes of trading. The major indices subsequently drifted
sideways to higher throughout the rest of the session before finishing in the
upper third of their intraday ranges. Both the S&P 500 and Nasdaq Composite
gained 0.9%, while the Dow Jones Industrial Average and S&P Midcap 400 indices
each rallied 0.8%. The small-cap Russell 2000 was higher by 0.7%. Yesterday’s
strength enabled both the S&P and Dow to close at fresh six-year highs, but the
Nasdaq is still trading below its prior high that was set last month. The
Russell 2000 and S&P Midcap 400 indices also remain just below their prior
highs.

Volume was higher across the board, confirming yesterday’s
gains. Total volume in the NYSE increased by 7%, while volume in the Nasdaq was
6% higher than the previous day’s level. The gains on higher volume enabled both
the S&P and Nasdaq to register bullish "accumulation days," the first such day
in the NYSE since December 5. The NYSE volume also rose above its 50-day average
level for the first time in nine trading days. As one would expect, market
internals were firmly positive. In the NYSE, advancing volume exceeded declining
volume by a margin of 3.5 to 1. The Nasdaq adv/dec volume ratio finished
positive by 3 to 1, but dwindling buying interest throughout the day caused the
ratio to fall from its morning high of more than 8 to 1.

In yesterday’s newsletter, we explained how the Semiconductor
Index ($SOX) was at a critical "make it or break it" level of its 50 and 200-day
moving average convergence. The bulls immediately scooped up shares of
semiconductor stocks on yesterday’s open, enabling the $SOX to close 1.9%
higher. If not for the strength in the $SOX, yesterday’s broad-based gains would
have been difficult to achieve. The $SOX held support of its 50 and 200-day
moving averages, but now it is back in "no man’s land," stuck in its previous
one-month range of choppy and directionless price action. would not have
occurred. on the $SOX as it retraced to its 200-day MA.

In addition to the $SOX, the Oil Service Index ($OSX) was a
strong performer yesterday. The 1.3% gain in the $OSX enabled the Oil Service
HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating) to convincingly break out above the high of its multi-week
consolidation that we pointed out yesterday. If you bought OIH on a breakout
above its December 8 high of 148.47, you are already sitting on a gain of more
than 1.5 points as of the close. As always, the prior resistance at the 148.50
area should now act as support on any pullback. Therefore, you might consider
trailing your stop to just below the prior high in order to protect against an
immediate failed breakout.

In the

November 21 issue of
The
Wagner Daily, we initially pointed out the bullish setup in the
CurrencyShares Euro Trust
(
FXE |
Quote |
Chart |
News |
PowerRating). It broke out sharply the following day,
closing at a new all-time high, then trended steadily higher through December 1.
Unfortunately, much of the gain from the FXE breakout was the result of
overnight opening gaps as opposed to intraday trends. We planned to buy the
initial breakout on November 22, but we passed it by because the sharp opening
gap negatively skewed our risk/reward ratio on the trade. Since peaking on
December 1, we have been patiently stalking FXE, waiting for a decent price
correction that would provide a second chance to buy it. We believe that time
may be coming soon. Take a look at the daily chart of FXE:

As you can see, FXE dropped down to support of its 20-day
moving average yesterday. In strongly trending stocks and ETFs, a retracement
down to the 20-day MA often marks the low of a correction before the equity
heads back up to its high. However, it is important to wait for confirmation of
support before stepping up to the plate. In this case, the "safest" entry point
is when FXE trades above the previous day’s high. If that occurs today, we could
buy over yesterday’s high, but we will continue to wait patiently if FXE fails
to move above yesterday’s high.

The Market Vectors Gold Miners
(
GDX |
Quote |
Chart |
News |
PowerRating) is another ETF that
is setting up for a low-risk entry on the long side. Unlike the StreetTRACKS
Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating), which mirrors the price of the spot gold commodity, GDX is
tied to the price movement of a basket of gold mining stocks. In this latest
rally, the mining stocks have shown more relative strength than the commodity
itself, so we think GDX is a better bet than GLD if considering gold. On the
chart below, notice how GDX has been trending steadily higher since the
beginning of October and has corrected down to and bounced off support of its
20-day MA. Again, waiting for an entry over yesterday’s high is ideal because it
would help to confirm that a short-term bottom has been formed:

Despite having flashed several hints of a possible top over
the past week, we were not shocked that the S&P 500 broke out to a new six-year
high yesterday. On a basic technical level, its consolidation at the high has
been tight and narrow over the past week and a half, so the odds favored an
eventual breakout above the range. With a lack of overhead supply from prior
highs, it never takes a lot of buying pressure for an index trading at a 52-week
high to move further upwards. How long it holds above that range is anybody’s
guess, but at least it moved out of the range. The market clearly remains
resilient, but the only thing that concerns us is the continued relative
weakness in the Nasdaq 100 and the Russell 2000. If those indexes catch up to
the S&P by moving to new highs, we’ll feel much more comfortable on the long
side of the market, but the range-bound $SOX is no good. As always, remember to
trade what you see, not what you think!

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 .