The 3 best gold stocks to trade on the long side

The major indices closed modestly
lower across the board last Friday, as trading activity declined
ahead of the three-day holiday weekend. Both the S&P 500
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SPX |
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Composite
(
COMP |
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lost 0.1%. Small and mid-cap stocks resumed their corrective action and showed
the most relative weakness. The S&P 400 Midcap Index
(
MDY |
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Smallcap Index
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major indices closed near their intraday lows and also near their lows of the
previous day. Despite Friday’s loss, the Nasdaq Composite snapped its 4-week
losing streak by advancing 1% for the week. The S&P 500 also gained 1%, but the
Dow moved only 0.5% higher last week.

Total volume in the NYSE declined by 23% last Friday, while
volume in the Nasdaq was 30% lighter than the previous day. Traders often head
out early ahead of extended holiday weekends, so it was not surprising to see
the drop in turnover. The broad market closed lower, but the decline in volume
prevented Friday from becoming another bearish "distribution day."

The CBOE Gold Index ($GOX), which we discussed last week, is
now poised to break out above its weekly downtrend line that has been in place
for the past ten months. The Spot Gold commodity is also poised for a breakout
as well, though gold itself does not always move in lockstep with the gold
mining stocks. Subscribers can note the trade details of the long setup in
(
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(StreetTRACKS Gold Trust) that we are targeting for entry this week. Along with
GLD, many individual gold mining stocks will break out if the $GOX does. Stocks
such as
(
NEM |
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(
ABX |
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charts are showing more overhead resistance than some of the smaller names such
as
(
GLG |
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(
RGLD |
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(
GG |
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side are those that have been consolidating near their 52-week highs, as a
breakout above the weekly downtrend in the $GOX will easily push those stocks
above their ranges and to new highs. As the weekly chart below illustrates, a
breakout above last week’s high will enable the $GOX to break its 10-month
downtrend line:

As we enter the new week, the major stock market indices are
poised to open in "no man’s land," making it difficult to anticipate a likely
direction in the short-term. The S&P 500, for example, rallied to close back
above its 50-day MA on August 31 and held above it for a day, but Friday’s loss
pushed the index back down to just below the 50-day MA. The S&P held on to most
of its gain from the August 31 rally, which is positive, but now it will once
again need to overtake both its 20 and 50-day moving averages. A rally above the
September 1 high of 1,227 will push the index back above its new daily downtrend
line, as well as its 20 and 50-day MAs, but be careful on the long side until
that happens:

The Nasdaq Composite followed a similar pattern to the S&P
last week and closed Friday just one point below its 50-day MA. The 20-day MA
continues to supply overhead resistance. The blue dotted horizontal line on the
chart below illustrates how the prior high of 2,156, from August 24, acted
perfectly as resistance on September 1. This is obviously a key area of
short-term resistance to monitor going into today:

The Dow Jones Industrial Average was the only one of the three
major indices that failed to rally back above either its 20 or 50-day moving
averages at any point last week. This index continues to show the most
intermediate-term relative weakness and should clearly be avoided on the long
side unless it can recover back above its 20, 50, and 200-day moving
averages that are all clustered together:

The Biotechs
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BTK |
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helping to give support to the Nasdaq, but the Semiconductors
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SOX |
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still trading in a narrow range. We remain long
(
BBH |
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the breakout, but keep an eye on
(
SMH |
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last week only ten cents above its 50-day MA. SMH has been trading above its
50-day MA since May, so a confirmed break below that level could indicate an
intermediate-term correction in the sector. As the Semis go, the Nasdaq usually
follows, so let’s carefully see how well the Semis perform over the next few
days. Take it easy on trading the broad-based ETFs until the S&P and Nasdaq
figure out whether or not to recover above or stay below their pivotal 50-day
moving averages. One positive is that, either way, volume should begin to return
to the markets now that summer holidays are concluding.

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 .