This ETF may be setting up for a long entry

Weakness in the technology-related
sectors caused the broad market to sustain
another round of losses yesterday, but much lighter turnover helped temper the
effect. The Nasdaq Composite
(
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PowerRating) fell 1.0%, the small-cap Russell 2000
lost 0.9%, and the mid-cap S&P 400 dropped 0.8%. However, relative strength in
the Retail and Pharmaceutical sectors helped to prop up the S&P 500
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PowerRating),
which closed only 0.3% lower. The Dow Jones Industrial Average
(
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PowerRating), which
has been holding up well throughout this month’s broad-based weakness, lost only
0.2%. The S&P 500 finished near the middle of its intraday range, indicating a
bit of indecision into the close, but the other indices closed in the lower
third of their ranges yesterday.

For the bulls, the one positive about yesterday’s session is
that total volume declined significantly in both exchanges. Volume declined by
21% in the NYSE, while turnover in the Nasdaq was 18% lighter than the previous
day’s level. Yesterday’s volume levels were well below their 50-day averages in
both exchange, and it was also the lightest volume day of 2006. This tells us
that institutions and professional traders really stood on the sidelines
yesterday, perhaps in cautious anticipation of new Fed chief Bernanke’s Capitol
Hill testimony on Wednesday.

One of the few sector ETFs that may be setting up for long
entry is
(
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PowerRating) (Gold Trust). As it has been steadily trending higher, we
have profitably traded this ETF on several occasions over the past six months.
We did not participate in the most recent move last month, but GLD has since
corrected down to support of its daily uptrend line and 50-day moving average.
Looking at the chart below, notice how the uptrend line from the November low
loosely converges with support of the 50-day MA:

Needless to say, the correction down to its trendline and
50-MA should soon provide us with a low-risk entry point on the long side. Even
better is the fact that the gold commodity’s performance is not directly tied to
the stock market’s direction. Be aware, however, that buying a stock or ETF on
the first touch of its 50-MA without first having confirmation of the uptrend’s
resumption is a bit risky. Instead, we recommend waiting to make sure buyers
will step in at the 50-MA, then subsequently buying the first break of the
hourly downtrend line that is now forming from the February 3 high. Having
patience to play it this way prevents you from getting shaken out, as trend
continuations near 50-day moving averages are often quite volatile. We have
already begun to stalk GLD for the proper re-entry point and will promptly
inform regular subscribers when we feel the time is right to buy. In the
meantime, you may want to add GLD to your watchlist, as well as the individual
gold mining stocks.

Regardless of the reason for such light broad market volume
yesterday, we must be cautious when turnover falls to such light levels because
the market can easily make a fast and furious move in either direction when
institutional activity returns. Based on the recent string of numerous
"distribution days," one could conclude that institutions will continue to sell
into strength in the short-term. However, a healthy dose of caution is warranted
on both sides of the market right now, as the major indices are hanging near
pivotal support/resistance levels. The S&P 500, for example, has been stuck in a
choppy, sideways range for the past five days. Preventing the index from
rallying is overhead resistance of the 20 and 50-day moving averages, while
horizontal price support from prior lows has been enabling the index to hold up:

The Nasdaq Composite has a similar chart pattern as the S&P,
although it has been a bit weaker. The index closed at its lowest price of the
calendar year yesterday, although it is trying to clinging to the January 23
intraday low. If the Nasdaq breaks yesterday’s low, it will likely drop all the
way down to test its January 3 low. This is illustrated on the chart below:

Consider taking it easy with new trade entries over the next
several days. Yesterday’s large drop in turnover indicates institutions are
taking a "wait and see" stance, and astute traders will do the same. Instead,
focus on managing existing positions with tightened trailing stops.

Open ETF positions: