SOX snap-back

July 12, 2006
Deron Wagner

For the first time since the broad market registered strong
gains on June 29, both exchanges registered bullish “accumulation days.” Total
volume in the NYSE was 24% higher than the previous day’s level, while volume in
the Nasdaq increased by 27%. “Accumulation days,” which occur when the broad
market advances on higher volume, are indicative of institutional buying. More
than half of the stock market’s daily turnover is the result of trading activity
from mutual funds, hedge funds, pensions, and other institutions. As such,
volume spikes in the market are the footprint of institutional trading activity.
The price action of stocks on those days tells us how the market is behaving
“under the hood.” When a market closes higher and on higher volume, it is
known as an “accumulation day.” Conversely, a “distribution day” occurs when
stocks close lower, but on higher volume. Following the broad market’s price to
volume action on a daily basis is a great way to know what the “smart money” is
doing before Joe Public finds out.

Just as quickly as we showed you how the Semiconductor Index
($SOX) had fallen below its 200-week moving average, it snapped back above it in
yesterday afternoon. Sudden strength in the $SOX was certainly a major reason
for the broad market’s late days reversal. The $SOX recovered all of its
previous day’s losses and then some by rallying 3.3%. Of all the industry
sectors we follow, it was the top percentage gainer yesterday. Nevertheless,
there is no technical reason to begin buying semiconductor stocks unless your
time horizon is very short and you are capable of selling into strength while
maintaining tight stop losses. Although the semis may see a few days of
follow-through momentum to the upside, there remains a lot of overhead
supply within the sector. When the market reverses, you should focus on stocks
and ETFs that were showing the most relative strength when the broad market was
weak. These, as opposed to stocks and ETFs near their lows, are usually the ones
that make the biggest gains.

Curiously, the commodities-related sectors posted the biggest
gains outside the Semiconductors. The Oil Service Index
(
OSX |
Quote |
Chart |
News |
PowerRating) surged 3.0%,
while the Gold Index
(
GOX |
Quote |
Chart |
News |
PowerRating) gained 2.7%. A couple of ETFs that track
commodities are also starting to look pretty bullish on the long side again. We
bought the StreetTRACKS Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating) when it broke out above its daily
downtrend line on June 21, then sold it into strength for nearly a five-point
gain when it rallied into its 50-day moving average four days ago. Although we
closed the position due to resistance of its 50-day MA, we have been continuing
to monitor its performance over the past several days. After a brief, two-day
pullback, GLD rallied again and broke out above its 50-day MA yesterday.
Ideally, we would like to see it consolidate in a narrow, sideways range above
its 50-MA, for at least the next one to two weeks, as that would build a base of
support from which GLD could stage its next leg higher. Regardless, spot gold
and the Gold Trust are continuing to show nice relative strength since breaking
out above that downtrend line last month. We feel it is relatively low risk to
be long GLD, just as long as your stop is not much below new support of the
50-MA:

The DB Commodity Index
(
DBC |
Quote |
Chart |
News |
PowerRating) is another commodity-based
ETF that is showing a bullish chart pattern. It corrected along with the broad
market throughout May and June, then broke out above its primary downtrend line
at the end of June. Since then, it has already recovered nearly two-thirds of
its loss from the May to June correction, putting it above the pivotal 61.8%

Fibonacci retracement level. DBC broke out above its 50-day moving average
on July 3, then subsequently consolidated in a narrow range for four days before
breaking out above that range yesterday. It closed yesterday at its highest
price since May 12, which was only one day after DBC set its all-time high.
Looking at the chart below, notice how DBC is poised to break out above a major
area of horizontal price resistance. If it does, we will probably see a retest
of the May high pretty rapidly:

Outside of Semiconductors and Commodities, the gains in other
sectors were relatively mild. A handful of sectors also closed lower yesterday,
confirming the mediocre breadth readings of the market internals. Airlines ($XAL)
and Home Construction ($DJUSHB) both shed 1.5%, while Retail ($RLX) and Telecom
($XTC) each fell 0.5%. Pharmaceuticals ($DRG), Transportation ($DJT), Insurance
($IUX), and Computer Networking ($NWX) were all modestly lower.

Genentech (DNA) announced the results of their quarterly
earnings after the close and they exceeded analyst estimates. However, sales of
a key drug came in below estimates, prompting a negative reaction in its stock
price in the after-hours session. Genentech was the first of the Nasdaq giants
to report its quarterly earnings, but many more are on tap over the next several
weeks. Genzyme (GENZ), another key biotech company, reports tomorrow as well, so
the biotechs may see some action over the next several days. Next week, be on
the lookout for earnings reports from IBM, Motorola, Qualcomm, Amgen, and
Broadcom, just to name a few.

Open ETF positions:

Short MDY (regular subscribers to

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receive detailed stop and target prices on open positions and detailed setup
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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

SOX snap-back

BUY THE FEAR, SELL THE GREED

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