These Sector ETFs Give You Better Setups Than QQQQs and SPYs

It was a volatile and indecisive session
that resembled a roller coaster ride, but the major indices closed higher across
the board yesterday. The broad market initially brushed off Wednesday’s bearish
reversal day by recovering all of the previous day’s losses, but overhead supply
from the recently trapped bulls caused stocks to slide back down to their
opening levels. Buyers returned in the final hour of trading and lifted the
major indices to close near their morning highs. The S&P 500 Index gained 0.7%,
the Nasdaq Composite moved 0.8% higher, and the Dow Jones Industrial Average was
up 0.9%. Both the S&P 400 Mid-Cap Index and Russell 2000 Small-Cap Index kept
pace with the broad market and posted gains of 0.7% and 0.9% respectively.
Although the stock market posted solid gains, a quick look at the intraday chart
of the S&P 500 below shows yesterday was really a tug-of-war between the bulls
and bears:

Unfortunately for the bulls, volume was the one thing that was sorely lacking
from yesterday’s rebound. Total volume in the Nasdaq declined by 14%, while
volume in the NYSE was 7% lower than the previous day’s level. Considering that
Wednesday was a "distribution day" in which stocks sold off on higher volume, it
is not good that the recovery attempt occurred without a corresponding rise in
turnover. In the four weeks that preceded August 10, a majority of the market’s
"up" days were on higher volume, while only one of the "down" days was on higher
volume. Such action is the recipe for a healthy market, but Wednesday’s drop on
higher volume combined with yesterday’s bounce on much lighter volume may be
serving as an early warning sign to astute traders and investors. It is
definitely too early to suggest the market has formed an intermediate-term top,
but remember that key changes in volume levels often precede changes in price.
Traders who closely follow price action of the major indices but ignore changes
in volume patterns often pay a steep price for their error.

As for individual sectors, Gold stocks really shined yesterday! The Philly
Gold and Silver Index
(
XAU |
Quote |
Chart |
News |
PowerRating) rocketed 4.1% higher yesterday, as many mining
stocks broke out of long bases of consolidation. We have been talking about
strength in $XAU ever since the index broke out above its 200-day moving average
on August 3. In the five sessions that followed, $XAU retraced about half of its
initial breakout, but then blasted off above the August 3 high yesterday. The
chart below illustrates this:

(
GLD |
Quote |
Chart |
News |
PowerRating), which is the ETF that tracks the price of Spot Gold, gained 2.1%
yesterday and also closed at a new high of the calendar year. Although we
scratched our initial entry in GLD yesterday, we will probably re-enter if it
trades in a bullish consolidation pattern from here. Both the Oil
(
XOI |
Quote |
Chart |
News |
PowerRating) and
Oil Service
(
OSX |
Quote |
Chart |
News |
PowerRating) sectors continued to show relative strength, as both
sectors again closed at new record highs. Most of the other sectors turned in a
mixed performance of being within 1% of unchanged levels. On the international
front,
(
EWA |
Quote |
Chart |
News |
PowerRating) (iShares Australia) rallied 2% and set a fresh all-time high
yesterday. Our long position in EWA is now showing a 3.1% gain since our entry
on August 3.

Yesterday’s erratic intraday action caused each of the major indices to close
within their trading ranges of the previous day. As such, the technical picture
for the broad market has not really changed since our detailed analysis of the
S&P, Nasdaq, and Dow in yesterday’s Wagner Daily. The broad-based ETFs
and indexes are now in "no man’s land," which means they are stuck in the middle
of pivotal support and resistance levels. You may wish to review yesterday’s
newsletter for a quick look at where these support and resistance levels are, as
it is not wise to aggressively enter new positions on either side of the market
until the broad market resolves itself. Remember that patient and disciplined
traders are consistently profitable because they wait for the perfect trade
setups to come to them, rather than forcing them to happen. This is the reason
why professional traders often spend more time out of the markets than
in the markets.

Dell Computer
(
DELL |
Quote |
Chart |
News |
PowerRating) and a handful of other tech companies reported
quarterly earnings after the close yesterday. The initial reaction to Dell’s
report resulted in an 8% drop in the after-hours session, which also dragged the
Nasdaq futures lower after the close as well. Just as Cisco’s negative report
hurt the Nasdaq on Wednesday, the index could again see pressure today. Honor
your stops and always trade what you see, not what you think!

Open ETF positions:

Short RTH, short UTH, long EWA (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

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 .