This sector looks great for more upside

Stocks kicked off the new year with a
session of impressive, broad-based gains
Tuesday, after shaking off initial morning weakness. The major indices began the
day with an opening gap up above their previous day’s highs, but the indices had
fallen into negative territory after the first hour of trading. The tone
improved and the broad market began to recover going into mid-day, then rocketed
higher after the Fed minutes were released at 2:00 pm EST. The enthusiasm held
into the close, as each of the major indices finished near their intraday highs.
The S&P 500 powered 1.6% higher, the Nasdaq Composite
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higher, the mid-cap S&P 400
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reversal, as the Russell 2000 Index shook off an ugly 1% intraday loss and
finished 1.6% higher. Overall, yesterday’s intraday volatility was a good
example of why we advised caution on both sides of the market this week.

As one would expect to see now that the holiday season has
passed, turnover surged higher across the board. Total volume in the NYSE
increased by 75%, while volume in the Nasdaq was 32% higher than the previous
day’s level. Most importantly, turnover in both exchanges rose above 50-day
average levels, confirming the return of institutional activity. The gains on
higher volume enabled both the S&P and Nasdaq to register a bullish
"accumulation day," the first clear day of institutional buying in nearly three
weeks.

Throughout the latter half of December, we recommended making
a watchlist of strong sectors for potential entry after the holidays. Now that
the new year has begun, let’s take an updated look at the technical picture of
each of those sectors. To refresh your mind, the sectors we liked with relative
strength and bullish chart patterns were: Gold Mining ($GOX), Biotech
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and Pharmaceuticals
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PowerRating). We also were anticipating a big move in either
direction for the Semiconductor Index ($SOX), as it was sitting at a pivotal
support level in late December. Of these sectors, one in particular stormed out
of the gates yesterday and unequivocally turned in the most impressive sector
performance in the stock markets. After wrapping up 2005 with only a very modest
correction last month, the Gold Mining Index
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PowerRating) exploded to a new record
high by gaining an astronomical 7.2% yesterday! A $15 per ounce rise in the
price of spot gold also enabled GLD, the ETF that mirrors the commodity, to
close at a fresh all-time high. The gold index was on our bullish watchlist
coming into the new year, but we certainly did not expect it to blast into the
stratosphere on the first trading day of the new year! Kudos to traders who were
savvy enough to quickly spot the early relative strength and position themselves
long in GLD or the gold mining stocks. The $GOX may be a bit extended in the
short-term, but the lack of overhead resistance should enable the sector to stay
strong in the intermediate-term.

Although it rallied only 0.9% yesterday, the Biotech Index ($BTK)
still looks great for further upside this month. Looking at the weekly chart of
the $BTK, notice how it has been consolidating near its five-year high for the
past eight weeks:

Narrow, sideways consolidation near the highs, as currently
seen in the $BTK, usually leads to new highs unless the overall bias of
the broad market quickly changes to negative. Assuming that overall market
sentiment remains neutral to positive, a corresponding long entry in BBH
(Biotech HOLDR) this month looks good. As illustrated below, the ideal entry
point in BBH is over the high of its downtrend line from the November 21 high:

The third sector we liked for potential long entry this month
was the Pharmaceuticals ($DRG), as well as PPH (Pharmaceutical HOLDR). The $DRG
index began to reverse an extended downtrend by breaking out above its 200-day
moving average on December 19. It subsequently consolidated near the highs
throughout the remainder of December, then began the new year with a 2% gain
yesterday. The index closed at a new 15-week high yesterday and continues to
show signs of completely reversing last year’s weakness. Regular subscribers
were sent an intraday e-mail alert informing them of a new long entry in PPH
yesterday, as we expect decent gains in the coming weeks.

In the final paragraph of yesterday’s Wagner Daily, we
mentioned that the Nasdaq’s correction down to its 50-day moving average for the
first time in months could easily serve as in impetus for a rally. Although a
positive reaction to the FOMC minutes provided a good excuse for the afternoon
strength, a bigger reason was probably the 50-day MA. Notice how the Nasdaq
Composite sharply reversed after running stops below its 50-day MA in the
morning:

Yesterday’s action in the Nasdaq was a classic reversal off
moving average support. Institutional buying programs often kick in when the
major indices initially correct down to support of their 50-day moving averages.
Considering the index is now only 1.3% off its prior high from December, we now
expect the Nasdaq to probe for a new high over the next week. As such, both QQQQ
(Nasdaq 100 Index) and SMH (Semiconductor HOLDR) are two ETFs we like for
short-term strength. However, caution should continue to exercised in the
intermediate-term.

Open ETF positions: