These 3 sectors look bullish

The major indices traded in a narrow, sideways range last Friday and finished the pre-holiday session near the flat line. The S&P 500 spent the entire day in a tight range of less than four points before finishing the day unchanged. Action in the Nasdaq
Composite, which closed 0.1% higher, was equally uneventful. The Dow Jones
Industrials closed lower by less than 0.1%, but both the small-cap Russell 2000
and mid-cap S&P 400 indices gained 0.3%. All but one of the industry sectors we
follow closed up or down by less than 1%. The Computer
Networking Index
(
NWX |
Quote |
Chart |
News |
PowerRating) showed the most relative strength and gained 1.3%.

As one might expect, turnover in both exchanges fell to the lowest levels of the year ahead of the three-day Christmas holiday. Total volume in the Nasdaq declined by 38%, while volume in the NYSE was 28% lighter than the previous day’s level. The extremely light volume levels indicate that most of last Friday’s activity was driven by retail investors. As such, it would be frivolous to place much emphasis on analyzing the significance of the day’s trading activity. Volume levels are likely to remain lower than average in the upcoming week, as many traders will be on vacation until after New Year’s Day.

Not much has been happening on the daily charts of the major indices during the past several weeks, but the longer-term weekly charts show the bullish consolidation remains in effect. The S&P 500 has been oscillating in a tight range between 1,246 and 1,275 for the past five weeks. Although it makes for lackluster trading in the short-term, the important thing is that the narrow-range consolidation near its four-year high should soon lead to new highs being registered. The longer an index consolidates in a narrow range, the more powerful the move will be when it eventually comes. We expect a significant range expansion shortly after the new year begins (or perhaps even sooner). The weekly chart of the S&P below shows a bullish “big picture” that overlooks the day-to-day chop on the daily charts:

The consolidation in the Nasdaq has been a bit looser, but the index formed a bullish “hammer” candlestick last week. It also bounced perfectly off support of the prior high from August 2005. The horizontal dotted line on the chart below marks the support level that enabled the Nasdaq to reverse last week:

Remember that our current short-term strategy is to remain on
the sidelines until New Year’s Day has passed, but be actively preparing a list
of sectors that are acting well in the meantime. Currently, we are stalking
three industries for potential long re-entries in January:
Gold
(
GOX |
Quote |
Chart |
News |
PowerRating), Biotech
(
BTK |
Quote |
Chart |
News |
PowerRating),
and Pharmaceuticals
(
DRG |
Quote |
Chart |
News |
PowerRating). Gold has the
strongest looking charts of the three and the GOX is also sitting at an all-time
high. The Biotech industry is poised to resume its weekly uptrend and has been
acting great since bouncing off support of its 50-day moving average on December
20. The BTK index is less than 1% away from closing at a new 5-year high. The
Pharmaceutical sector has a lot of overhead supply on its weekly chart, but last
week’s breakout shows promise, especially since the index is holding nicely
above its 200-day moving average. We expect further upside on the trend reversal
that is taking place in the DRG.

As always, we will be providing the usual technical analysis and market commentary during the holiday period, but entering new positions at this time is not advisable. Overtrading is easy to do in a light volume environment, and it only leads to churning your trading account. If you are currently flat, relax and take some time off. The market will certainly be here when you are ready to return, and remaining in cash during this time period is likely to save you money. If, however, you are already in positions that you like, simply set your good-til-canceled (GTC) stop orders and cruise into the end of the year as well.

Note that the U.S. equities markets will be closed on Monday, January 2. As such, The Wagner Daily will not be published that day, but regular publication will resume on January 3. MTG wishes you and your family a safe and happy ride into the new year!

Open ETF positions:

Short IWM (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.)

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
.