Watching For BBH Re-Entry Point…

The major indices surged higher out of the gates
yesterday morning, but the bears took control after the first ninety
minutes of trading and wiped out the early 0.7% gains in both the S&P 500 and
Nasdaq Composite. By early afternoon, each of the major indices had fallen into
negative territory, but moderate buying interest in the late afternoon reversed
the broad market once again. It was quite a wild and indecisive session of
intraday volatility, but the major indices eventually finished the day with
small gains. The Nasdaq Composite gained 0.3%, the S&P 500 moved 0.2% higher,
and the Dow Jones Industrials eked out a 0.1% gain. The tug-of-war between the
bulls and bears caused each of the major indices to close near the middle of
their intraday ranges. The Russell 2000 was the exception, as the small-cap
index closed at its best level of the session and with a 0.8% gain.

Total volume in the NYSE was the same as the previous day’s level, but volume
in the Nasdaq increased by 12%. The higher volume combined with the 0.3% gain in
the Nasdaq to technically mark the session as a bullish “accumulation day.”
However, because the prior day was the lightest volume day of the year,
yesterday’s Nasdaq’s volume was still approximately 15% below its 50-day average
level. The advancing/declining volume ratio in the broad market was positive in
the morning, mixed throughout most of the session, then turned positive during
the final thirty minutes of trading. In the Nasdaq, advancing volume exceeded
declining volume by a ratio of 1.8 to 1. The adv/dec volume in the NYSE finished
positive by a margin of 1.5 to 1. Despite indecision throughout most of the day,
the strong internals during the last thirty minutes of the session points to at
least marginal institutional support.

The primary weekly uptrend in the Semiconductor Index ($SOX) remains intact
and the index also gained 1.1% yesterday, but its intraday action was not
impressive. SMH (Semiconductor HOLDR) broke out above its daily downtrend line
from the August 3 high yesterday morning, but immediately reversed and dropped
back down to its opening low at mid-day. It recovered in the late afternoon and
finished the day in the upper third of its intraday range, but its intraday
action was certainly not healthy. When a stock or ETF that has corrected from a
strong weekly uptrend finally reverses, it should be a rapid, firm reversal that
marks the continuation of the primary trend. However, when a sector behaves as
the $SOX and SMH did yesterday, it calls into question the validity of its
recovery. The intraday chart of SMH below illustrates yesterday’s volatility and
indecision. The dotted blue line marks yesterday’s opening price and the dotted
red line marks the breakout price of the daily downtrend line:

SMH and the $SOX could still take off from here, but yesterday’s erratic
action makes us cautious about re-entering SMH on the long side, especially
given the light overall volume in the markets. We are, however, continuing to
watch BBH (Biotech HOLDR) for possible re-entry point, as the ETF is
consolidating at its highs on the weekly chart. Subscribers will be sent an
intraday alert if/when we decide to enter BBH, as broad market conditions will
be the primary determining factor.

In yesterday’s Wagner Daily, we illustrated how each of the major
indices were clinging to key support of their 50-day moving averages after three
prior sessions of narrow-range indecision. We also warned to be on the lookout
for “stop hunts” that would easily occur from a quick probe below and reversal
back above the 50-day moving averages. Not surprisingly, that is exactly what
happened yesterday. The S&P 500, Nasdaq Composite, and Dow Jones Industrials
were each trading below their 50-day moving averages at their afternoon lows,
but all three indices recovered to close just above their 50-day MAs.
Yesterday’s session was much more volatile than those in the latter half of last
week, but the indices once again finished near the middle of their intraday
ranges and just above support of their 50-day MAs. Therefore, the technical
situation remains the same going into today, as does our short-term advice —
don’t overtrade the current market or you will surely get chopped up. SOH
(“sitting on hands”) mode will likely be more profitable for you than attempting
to trade the broad market ETFs in the short-term. If you must trade, focus on
the specific industry sector ETFs that are showing relative strength or weakness
to the broad-based ETFs.

Open ETF positions:

Short RTH, short (small) UTH (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 .