Tech ETFs Starting to Show Strength

The broad market posted modest gains
yesterday, but lower turnover across the board tempered the advance.
The major indices moved in a non-committal, sideways range in the first half of
the day, then grinded a bit higher in the afternoon before finishing in the
upper third of their intraday ranges. The S&P 500, Nasdaq Composite, and Dow
Jones Industrial Average each rallied 0.2%, while the small-cap Russell 2000 and
S&P Midcap 400 indices both edged 0.1% higher.

Volume in both exchanges declined for the third straight day,
enabling the S&P and Nasdaq to dodge a bearish “distribution day” last Friday,
but also preventing yesterday from becoming a bullish “accumulation day.” Total
volume in the NYSE declined by 9%, while volume in the Nasdaq was 8% lighter
than the previous day’s level. Market internals were positive, but only by a
narrow margin. Both the NYSE and Nasdaq saw advancing volume exceed declining
volume by a ratio of approximately 3 to 2. Overall volume levels have been
drifting lower every day since the initial surge on the first trading day of the
new year, but has remained above average levels in each session. With quarterly
corporate earnings season starting this week, many traders have likely taken a
“wait and see” stance ahead of the plethora of reports on tap in the coming
weeks.

Yesterday’s action has no substantial effect on the technical
picture of the broad market. Both the Russell 2000 and S&P Midcap 400 indices
remain below their 50-day MAs, a negative for the overall stock market, but tech
strength is enabling the Nasdaq Composite to hold just above both its 20 and
50-day MAs. The S&P 500 and Dow Jones are basically in “no man’s land,” stuck in
the middle of their recent trading ranges. Rather than rehashing the same broad
market support and resistance levels we looked at in yesterday’s newsletter,
let’s take a brief look at which specific industry sector ETFs are showing the
most relative strength and weakness to the major indices. Buying the sectors
with relative strength and/or selling short those with relative weakness is a
great way to both increase your chances of profitability and decrease the odds
of churning your account in this indecisive market.

Only a couple of the sector ETFs we follow are showing decent
chart patterns and relative strength. The Software HOLDR
(
SWH |
Quote |
Chart |
News |
PowerRating), which we
brought to your attention last Friday, closed right at the high of its
three-month base of consolidation. Any further strength in the Nasdaq today
should cause the ETF to break out to a new four-year high:

Within the technology arena, the Computer Networking sector
has also been acting well, enabling the PowerShares Networking
(
PXQ |
Quote |
Chart |
News |
PowerRating) to
break out of an eight-week base of consolidation:

As long as PXQ holds above its prior high, which is new
support at the $18 level, it presents a low-risk entry on the long side. Both
the Software and Computer Networking segments are showing cleaner chart patterns
and more relative strength than other tech segments such as Semiconductors or
Internets. The Semiconductor Index ($SOX), for example, remains a chop-fest.
Given that the stock market is not exactly strong right now, “cherry picking”
only the best looking setups on the long side is essential.

As for the S&P and Dow-type sectors, the only ETF we see
attempting to break out to a new high is the StreetTRACKS Capital Markets
(
KCE |
Quote |
Chart |
News |
PowerRating),
which tracks the performance of the Securities Broker-Dealer sector:

On the short-side, both the oil and oil service sectors are
perhaps the weakest right now. However, the ETFs such as the Oil Service HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating)
and S&P Select Energy SPDR
(
XLE |
Quote |
Chart |
News |
PowerRating) have already fallen too far to provide an
ideal entry point. Instead, we are waiting for decent bounces into resistance
that would provide better risk/reward ratios. We also like the recent reversal
in the DJ Utilities Average ($DJU), which is reflected on the daily chart of the
Utilities HOLDR
(
UTH |
Quote |
Chart |
News |
PowerRating) below. We may initiate a new short position in UTH on
any strength:

Finally, we like the relative weakness in the iShares DJ Real
Estate Index Trust
(
IYR |
Quote |
Chart |
News |
PowerRating), which has been unable to stay above its 50-day MA.
After moving back above its 50-MA on December 27, it remained above it for only
five days before rolling back over. A break below the December 22 low of 81.69
will confirm the break of the 50-MA by setting a “lower low,” while the 20-MA
now acts as overhead resistance:

Though we showed you some of the ETF chart patterns we like
for both long and short entry, now is NOT the time to go crazy with a bunch of
new trade entries. A choppy and indecisive market is bad enough, but the
upcoming slew of earnings reports could add to the market’s erratic behavior.
Again, “cherry picking” and a reduction in your share size for new trade entries
is prudent.

Open ETF positions:

Long MZZ, SDS (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.)