This is the sector I’m focused on

The broad market drifted higher
throughout the morning session, but a modest selloff in the early
afternoon caused the major indices to finish near unchanged levels and in the
middle of their intraday ranges. The S&P 500
(
SPX |
Quote |
Chart |
News |
PowerRating) gained 0.1%, the Dow
Jones Industrial Average
(
DJX |
Quote |
Chart |
News |
PowerRating) lost 0.1%, and the Nasdaq Composite
(
COMP |
Quote |
Chart |
News |
PowerRating)
was unchanged. The S&P Midcap 400 Index was also unchanged, while the small-cap
Russell 2000 edged 0.1% lower. Each of our open positions that were showing an
unrealized gain moved deeper into positive territory, while our IWM short
position erased a bit more of its market to market loss.

Total volume in the NYSE declined by 31% yesterday, while
volume in the Nasdaq was 22% lighter than the previous day’s level. Because the
previous session was a “quadruple witching” options expiration day, turnover was
expected to be lower. Still, volume remained above average levels and well above
the lethargic activity of last month. Market internals were positive, but only
by a small margin. In the Nasdaq, advancing volume exceeded declining volume by
a margin of just over 3 to 2. The NYSE ratio was positive by only 1.3 to 1.

As anticipated, last Friday’s bullish “hammer” candlestick
that formed on the daily chart of the U.S. Oil Fund
(
USO |
Quote |
Chart |
News |
PowerRating) triggered an
upside reversal in most of the oil-related ETFs yesterday. The Amex Oil Index
rallied 2.4%, causing corresponding ETFs such as the S&P Select Energy SPDR
(
XLE |
Quote |
Chart |
News |
PowerRating)
to gain about the same amount. If you heeded our advice to tighten your stops to
just above the September 15 highs, you should have been able to quickly lock in
profits on any short positions in the oil sector. Though the sector will
probably retrace more of its recent loss in the short-term, we are not
considering long entries in oil because a lot of overhead supply remains.
Instead, we are waiting for a rally into the 20-day moving averages of the oil
ETFs and planning to sell short the retracement into resistance. The Gold and
Silver Index ($XAU) similarly gained more than 3% yesterday, but remains in bad
technical condition since falling below its 200-day moving average on September
11.

One sector we are focused on this week is the Semiconductor
Index
(
SOX |
Quote |
Chart |
News |
PowerRating), which is fast approaching overhead resistance of its 200-day
moving average. Since the beginning of August, the $SOX has been showing
relative strength to the broad market and has been trending steadily higher. But
even though the index has gained nearly 22% since bottoming on July 21, it still
remains 15% below its 52-week high. Further, the $SOX has retraced only half of
the loss from its January high down to its July low. Because such a lot of
overhead supply remains, it is highly likely that resistance of the 200-day
moving average will be difficult to overcome, at least on the initial attempt.
We have circled the 200-day MA on the daily chart of the $SOX below:

Per intraday e-mail alert to subscribers, we sent an e-mail
alert to subscribers yesterday informing them of our new short sale entry in the
Semiconductor HOLDR (SMH). Although it is still about 70 cents below resistance
of its 200-day MA, we liked the risk/reward ratio of a short entry near
yesterday’s high. The inverted “hammer” candlestick that formed on both the $SOX
and SMH last Friday was bearish, so a rally attempt up to last Friday’s high
provided us with a low-risk entry point. Obviously, our protective stop is above
the 200-day moving average (subscribers should note the exact stop price below).
Our downside price target is just above support of the 50-day moving average.
Confirmation of this trade setup should occur when SMH breaks below the
September 14 low. Note that we are not calling a top in the $SOX, but are
merely anticipating a technical price correction to the downside. The iShares
Semiconductor (IGW) is a similar ETF you might consider if you have trouble
locating shares of SMH to sell short, but note that IGW is already above its
200-MA. Most of the time, a simple phone call to your broker asking them to
locate shares of “hard to borrow” stocks and ETFs for you will do the trick.

This Wednesday, the Fed once again meets to discuss interest
rates. Although no change is expected in the actual rate, the data and
commentary will be scrutinized closely by traders and investors. Therefore,
traders will probably wait on the sidelines today, ahead of tomorrow’s meeting.

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 .