This ETF may soon break out

Despite a shortened trading session,
the major indices posted solid gains ahead of the Independence Day holiday. The
broad market gapped higher on Monday’s open, then settled into a steady intraday
uptrend until the 1:00 pm EDT closing time. The Nasdaq Composite
(
COMP |
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S&P 500
(
SPX |
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PowerRating), and small-cap Russell 2000 indices each gained 0.8%, while
both the Dow Jones Industrial Average
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(
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rallied 0.7%. Both the S&P 500 and Dow Jones Industrial Average closed back
above their 50-day moving averages and are nearing resistance of their prior
highs from June 2. All three of our open ETF positions advanced as well. We sold
half the shares of our StreetTRACKS Gold Trust (GLD) position for a 3.5 point
gain because it gapped to near our original price target of the 50-day moving
average. We are trailing a stop on the remaining shares of GLD to maximize
profit and protect our gain. Our other two open positions, the Telecom HOLDR
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and the iShares DJ Real Estate Index
(
IYR |
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in several months and continued to approach their 52-week highs.

Turnover was obviously lower in Monday’s brief session. Total
volume in the NYSE declined by 67%, while volume in the Nasdaq was 78% lighter
than the previous day’s level. Accounting for the early closing time, volume
levels were still lighter. Compared to 1:00 pm the prior day, 12% less shares
traded hands in the NYSE and 17% less in the Nasdaq. Considering that many
traders probably extended their holiday weekend and skipped Monday’s session
altogether, the turnover levels were pretty decent. So were market internals.
Advancing volume in the NYSE exceeded declining volume by a margin of 3 to 1.
The Nasdaq ratio was positive by 2 to 1.

Shortened pre-holiday sessions are often quiet and uneventful,
but that was not the case on Monday. Conversely, it was a continuation day that
built on the gains of June 29. More importantly, quite a few leading stocks
broke out of strong bases and exceeded the gains in the major indices by a wide
margin. A strong market always exhibits leadership by having the strongest
stocks break out to new highs ahead of the major indices. We have seen this over
the past few days, but there is a lack of consensus on whether or not any clear
sector leadership has developed overall.

One ETF that has begun to show relative strength and may soon
break out is the DB Commodity Index
(
DBC |
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PowerRating). Like nearly every other exchange
traded fund, DBC corrected off its highs when the broad market sold off
throughout May and most of June. However, it showed relative strength by falling
less than the major indices and confirmed that strength by outpacing the
recovery of the broad market as well. DBC has closed higher in five of the last
six sessions and recovered back above its 50-day moving average on Monday. There
is horizontal price resistance at its current price level, so it will probably
take a rest for at least a few days, but we are expect an eventual breakout and
test of its prior high:

If DBC consolidates from here, it will form the handle of a
short-term

“cup and handle” chart pattern. If such a bullish pattern forms, the ideal
buy point would be over the high of the “handle,” which would most likely be the
$26 to $26.50 area. We will keep an eye on how DBC develops over the next week
and will let you know if it presents a proper entry point. Two other
commodity-based ETFs, the U.S. Oil Fund
(
USO |
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PowerRating) and the StreetTRACKS Gold
Trust
(
GLD |
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PowerRating), have both made decent gains over the past week, but may take a
break as well.

We normally focus purely on technical analysis and do not
discuss geopolitical news, but there is one news item that may cause a bit of
indecision and volatility in the markets today. Reports that North Korea tested
six short-range and one long-range missiles yesterday has resulted in a downside
gap in both the S&P and Nasdaq futures in the pre-market. A healthy market will
often ignore news that would otherwise be perceived as negative, but bear in
mind that stocks still have a lot of overhead supply from the prior selloff. As
such, the markets may currently be more susceptible to negative news events. No
definite change of plan is required solely because of this news, but just be
prepared for a potentially indecisive and whippy session as traders digest the
impact of the news.

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 .