This ETF could break out to a new high

The broad market traded in a narrow,
sideways range yesterday, as stocks digested their recent gains. The
major indices finished near the flat line as well. Both the S&P 500
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and Dow Jones Industrial Average
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Composite
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and mid-cap stocks showed a bit of relative weakness. The Russell 2000 lost 0.4%
and the S&P Midcap 400 fell 0.7%. While both indices usually outpace the S&P,
Dow, and Nasdaq on the “up” days, they also tend to retrace the most when the
stock market pauses or corrects. Despite a relatively unchanged day in the broad
market, many leading stocks continued breaking out and held on to their
recent gains. This is a positive sign, as most broad market rally attempts in
recent months lacked the leadership of strong individual stocks.

As we often see on consolidation days, turnover dropped off in
both exchanges. Total volume in the NYSE declined by 12%, while volume in the
Nasdaq was 3% lighter than the previous day’s level. It was positive that lower
volume matched the flat market action because it indicates the bears did not
sell into strength while the bulls took a break. Had volume been higher without
a corresponding gain in price, it would have pointed to bearish “churning,” but
that was not the case. In the NYSE, advancing volume marginally exceeded
declining volume. The opposite was true in the Nasdaq.

In yesterday’s newsletter, we highlighted the Xinhua China 25
Index
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strength. Upon doing further research last night, we discovered another
international ETF that has also been acting well. The iShares Belgium Index
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nevertheless. For the past five weeks, it has been consolidating near its
all-time high in a narrow range. As the weekly chart below illustrates, EWK is
only 13 cents away from breaking out above its prior high that was set in May of
this year. Notice also how the 50-week moving average (the teal colored line)
has perfectly acted as support on several occasions since July of 2005:

Most likely, the consolidation of the past five weeks is
creating a solid base for EWK to break out to a new high. When it does, you
might consider buying the breakout and simply placing your stop just below the
pivotal breakout level. Doing so would provide you with a very positive
risk/reward ratio because stocks and ETFs trading at new record highs lack any
type of overhead supply that acts as resistance.

The Nasdaq 100 Index Tracking Stock (QQQQ), which often acts
as a barometer of the broad market’s health, finally rallied up to test
resistance of its 200-day moving average. It was the first time in four months
that QQQQ has touched its 200-day MA. The Nasdaq 100 still remains much further
below its 52-week high than the S&P or Dow, but it has been catching up quickly:

Many industry sectors and leading stocks have been acting
quite well over the past week, so it’s not likely the 200-day MA on QQQQ will
trigger a sharp reversal to the downside. However, it does provide a good excuse
for the bulls to take a break. We therefore expect to see a bit of sideways
consolidation and perhaps a modest price retracement in the short-term. As long
as the broad market correction is not too steep, it will provide a good chance
to scoop up shares of strong ETFs and stocks that pullback or move into support
of their primary uptrend lines. Overall, more sectors are now in uptrends than
downtrends, especially the tech-related issues, but there are still a few
pockets of weakness such as Utilities, Energy, and Gold/Silver.

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 .