These ETFs are showing strength

Stocks began the week with a rather
uneventful session, as the major indices meandered in a lethargic,
sideways range throughout the entire session. The Dow Jones Industrial Average
gained 0.1%, but the S&P 500
(
SPX |
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Nasdaq Composite
(
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small and mid-cap sectors, both of which typically lead the broad market. The
Russell 2000 fell 0.5% and the S&P Midcap 400 slid 0.7%, the latter of which
caused our short position in the S&P Midcap SPDR
(
MDY |
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PowerRating) to near its original
profit target of the June 14 low. The trade is presently showing a marked to
market gain of more than 5 points and we have tightened our stop to protect the
profit. Regular subscribers should note the updated stop price below today’s
commentary.

Total volume in the NYSE declined by 13% yesterday, while
volume in the Nasdaq came in 14% below the previous day’s level. Considering the
minimal price action in the broad market, it’s not surprising that turnover was
lower as well. As one might expect from a session in which the major indices
were nearly unchanged, market internals were basically neutral. Declining volume
was marginally higher than advancing volume in the NYSE, but the Nasdaq
internals finished in parity.

Gold and oil futures contracts sold off sharply yesterday, as
did the stocks that comprise the sectors. The Gold and Silver Sector Index
(
XAU |
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declined 3.4%, while the Oil Service Index
(
OSX |
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from those two sectors, all the other industries we follow closed within 1% of
the flat line. Telecom and Internet stocks rallied a bit and Biotech stocks
showed weakness, but it was a pretty boring and uneventful day overall.

As you may recall, we suggested avoiding the oil related
stocks and ETFs before the market opened yesterday due to the recent abundance
of news out of the Middle East. Although one might have anticipated higher
prices in the face of the Middle East turmoil, it’s dangerous to predict the
market’s reaction to news events. By the time the general public gets the
idea to buy a sector or stock, it’s usually too late because it’s too obvious.
In this situation, it appears that institutions sold into strength of oil’s
recent rally because they had already bought stocks at much lower levels. Basing
your trading decisions purely on news events is always a risky proposition
because the stock market rarely reacts as one might expect it would. Conversely,
relying on technical analysis enables you to remove the “mental clutter”
generated from the talking heads you see on TV every day.

Several of the fixed-income (bond) ETFs have begun to show
strength. The fixed-income family of ETFs from iShares enables traders and
investors to take long positions in ETFs that may offer less risk of
depreciation if the stock market continues to drop. We like that the bond ETFs
are not directly correlated to the price action in the stock market. As an added
bonus to those who hold them long-term, dividends are paid out just the same as
if you bought an actual bond. Of all the bond ETFs, we feel the best chart
pattern right now is in the iShares Corporate Bond Fund
(
LQD |
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PowerRating). As the chart
below illustrates, LQD has been in a steady downtrend for a long time, but it
has begun to break out above resistance of its secondary downtrend line that has
been in place since January of 2006:

Although the weekly chart is pictured above, a glance at the
daily chart will show you that LQD is also testing overhead resistance of its
50-day moving average. The 50-day MA has acted as resistance on several
occasions when LQD attempted to rally over the past year, but we are watching
for a potential breakout this time, as a “flight to safety” may begin generating
more interest in bonds. Subscribers will see that we are stalking LQD for a new
potential long entry if it trades above our trigger price. For a list of the
other bond ETFs and links to descriptions of them, download the

free Morpheus ETF Roundup.

The focal point for the broad market as we enter today remains
support of the prior lows from June 14 for both the S&P 500 and Dow Jones
Industrials. If those levels hold, it could result in at least a short-term
bounce off a double bottom. But keep in mind that the Nasdaq has already been
trading below its June low for the past three sessions. The longer it remains
below that level, the more difficult it will be to recover back above it. For
now, the Nasdaq is weighing on the other indices and could easily cause both the
S&P and Dow to break down to new lows as well. If you’re short, don’t be
complacent with your positions. Keep trailing your protective stops tighter and
be on guard for a reversal out of nowhere (which is when they usually happen).
Downtrending stocks and ETFs often snap back hard. As for long entries, we don’t
see a single equity-based ETF that shows a strong pattern worthy of
buying for anything more than a one to two day bounce. Instead, we are waiting
for the sector ETFs that have recently broken down to bounce into their new
resistance levels. When they do, we’ll be ready to enter new short positions.

Open ETF positions: