This sector looks set to resume it’s uptrend
The broad market managed another session of gains yesterday, enabling the major indices to maintain their perfect record in the new year. The all-time closing highs registered by both the small-cap Russell 2000 and mid-cap S&P 400 the previous day caused both indices to show the most relative strength. The Russell leapt another 1.0%, while the S&P 400 gained 0.8%. The Nasdaq Composite also maintained its momentum and closed 0.6% higher. The S&P 500 gained 0.4% and the Dow Jones Industrials 0.5%. All of the major indices have closed higher in each of the five trading days in 2006.
Total volume in the NYSE declined by 5%, while volume in the Nasdaq was 13% lighter than the previous day’s level. Another day of gains on higher volume would obviously have been better, but one cannot expect the S&P and Nasdaq to register “accumulation days” on each and every “up” day. Further, volume still came in above 50-day average levels in both exchanges. Market internals remained positive, as advancing volume exceeded declining volume by a margin of approximately 2 to 1 in both exchanges.
After a five-month correction throughout the latter half of
2005, the Home Construction sector (DJUSHB) has broken out above resistance and
has begun to resume its long-term uptrend. The index rocketed 5.7% higher and
closed at a five-month high yesterday. Now that the index has broken out above
major horizontal price resistance and its five-month downtrend line, odds are
good the index will recover to test its prior 52-week high. The daily chart of (DJUSHB)
below illustrates yesterday’s breakout above horizontal price resistance, while
the longer-term weekly chart below that illustrates the break of the five-month
downtrend line.
Launched last October,
(
PKB |
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PowerRating) is the new ETF that tracks the Home Construction sector. Note that PKB only trades an average daily volume of 16,000 shares per day, but remember that liquidity is less of an issue with ETFs than individual stocks. As the prices of the underlying stocks rise and fall, the bid/ask prices of an ETF will always move in correlation, even if there are no buyers or sellers at the time. You do, however, need to be a bit cautious with low volume ETF in terms of a wide spread. Limit orders are recommended when trading PKB or any other ETF that trades less than 100,000 shares per day. Notice how PKB
broke out along with the DJUSHB index yesterday:
With such a strong start to the new year and five straight days of gains, a short-term market correction is inevitable. When the first “down” day finally comes, the most important thing will be whether or not volume levels correspondingly drop. A decline in turnover on the broad market’s first day of losses would indicate the bulls are merely taking a break, while a spike in volume would point to institutional selling taking into strength. Remember that volume never lies and, unlike other technical indicators, volume is a leading indicator instead of a lagging one. As such, we recommend you pay close attention to the relationship between the broad market’s price and volume over the next several days, as it will yield clues as to whether or not the recent strength is a “sucker’s rally” or the start of something big in 2006.
Open ETF positions:
Long
(
PPH |
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PowerRating), long
(
DIA |
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PowerRating) (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)
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 .