This sector is stabilizing

The major indices scored their
strongest gains in weeks yesterday, as stocks trended steadily
upwards throughout the entire session and finished at their intraday highs.
Continued strength in the Semiconductor Index
(
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PowerRating), which rallied 3.8%,
helped the Nasdaq
(
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PowerRating) to post a 2.0% gain. Both the S&P 500 and Dow
Jones Industrial Average
(
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PowerRating) turned in solid performances as well, gaining
1.0% and 0.9% respectively. Even the small and mid-cap arenas that have been
lagging in recent days suddenly woke up. The Russell 2000 advanced 2.4%, while
the S&P Midcap 400 closed 1.7% higher.

Turnover picked up across the board, enabling the Nasdaq to
register its second consecutive “accumulation day.” Total volume in the Nasdaq
was 19% higher than the previous day’s level, while volume in the NYSE increased
by 8%. This time, the higher volume gains in the S&P pointed to institutional
buying in the NYSE in addition to the Nasdaq. Volume in both exchanges was well
above average levels, and was the highest in approximately one month. Volume
also was higher than it was on both “distribution days” that occurred on
September 6 and 7. Clearly, the buying power of mutual funds, hedge funds, and
other institutional traders were behind yesterday’s broad-based rally.

In addition to the strength in techs that we have noted over
the past several days, institutional money has also begun to rotate into a few
other sectors that have been dormant for a long time. The DJ U.S. Home
Construction Index
(
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PowerRating), for example, has been in a steady downtrend
the entire year, but it rocketed 6% higher yesterday. The first sign of
stabilization in the index occurred when it formed a slightly “higher low” on
August 14. After a small bounce, the $DJUSHB sold off to test support of that
August 14 low on September 7. It formed a “double bottom” at that point, which
helped the index to break out firmly above a four-week base of consolidation
and its 50-day moving average yesterday. There is still a substantial area
of resistance that is marked by the red dashed horizontal line on the chart
below, but we feel there is a good chance that yesterday’s momentum will carry
the index above that level within a few days:

As indicated on the

Morpheus ETF Roundup
are two different ETF families that are correlated to the Home Construction
sector. They are the iShares DJ U.S. Home Construction (ITB) and the
StreetTRACKS Homebuilders (XHB). The former moves pretty much in lockstep with
the $DJUSHB index, while the latter is weighted differently. But of the two, XHB
is more popular because it trades an average daily volume of 1 million shares
versus 100,000 shares for ITB.

Yesterday’s gain in the Nasdaq was impressive because it
enabled the index to erase all of its losses from the September 6 and 7
“distribution days.” As mentioned earlier, it also did so on higher volume than
both of those sessions. Looking at the chart below, you will see that the Nasdaq
closed above is prior high from September 5, but the 200-day moving average now
looms overhead. It’s anyone’s guess as to how easily the index will overcome its
200-day MA, assuming it even does, but this pivotal resistance level provides a
good reason to be cautious with new trade entries in this vicinity:

As we have been mentioning all along, the S&P 500 has much
less overhead resistance than the Nasdaq and is only one percent off its
multi-year high. Obviously, a breakout to a new 52-week high would be extremely
bullish for the S&P 500, but resistance of a prior high also provides a good
excuse for traders to sell into strength. Because of the key resistance areas
that both the S&P and Nasdaq are approaching, don’t become complacent!
Yesterday’s session definitely showed a lot of bullish momentum, but just
remember that none of the indices are at their 52-week highs and therefore still
must contend with varying degrees of overhead supply.

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 .