What you need to know if you trade the Nasdaq

The S&P 500 bounced back from Monday
afternoon’s selloff yesterday, but the Nasdaq Composite
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lagged behind. Both the S&P
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wiping out the previous day’s losses and then some, but the Nasdaq meandered
about in a sideways range before finishing only 0.2% higher. The S&P Midcap 400
Index gained 0.5%, while the small-cap Russell 2000 Index advanced 0.9%. The
S&P, Nasdaq, and Dow each had “inside days,” meaning that their intraday trading
ranges were completely contained within their respective ranges of the previous
day. Such “inside days” often occur during price consolidations, but they don’t
mean much when the major indices are stuck in a choppy trading range.

Total volume in both the NYSE and Nasdaq was about the same as
the previous day’s levels, falling less than 1% in both exchanges. Again,
turnover exceeded average levels, hinting at a bit of “churning” near the highs.
If the broad market was trading at new highs, the volume increases over the past
two weeks would be positive, but the major indices have yet to breakout and
hold. Market internals were positive in the NYSE, as advancing volume
exceeded declining volume by a margin of 2 to 1, but the Nasdaq’s ratio was only
positive by a nominal ratio.

One industry that made a stealth move underneath the surface
of yesterday’s lethargic session was the Dow Jones Utilities Average
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DJU |
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which zoomed 2.4% higher and broke out above resistance of its four-month
downtrend line. The two most popular ETFs that track the Utilities sector are
the Utilities HOLDR
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UTH |
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(
XLU |
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the two, the chart pattern in UTH has followed the trend of the actual sector
index the closest. Looking at the daily chart of UTH below, notice how it not
only broke out above its downtrend line (the dotted blue line), but also has
formed two “higher highs” and one “higher low:”

The “higher highs” and “higher low,” combined with the break
of the daily downtrend line, tell us that UTH has broken its downtrend and
may be in the process of starting a new uptrend. The long-term weekly chart
also shows that UTH formed a “double bottom” in the middle of last month, which
further adds to the bullish technical picture:

The only negative with this setup is that UTH closed right at
resistance of its 200-day moving average. However, we don’t think it is a big
problem because the weekly “double bottom” and break of the downtrend line
should be more significant. Regardless, we will wait for confirmation of a
breakout above the 200-day MA before buying UTH. Regular subscribers will see
the trigger, stop, and target prices below. We also continue to stalk the
Regional Bank HOLDR (RKH) for potential long entry over yesterday’s high.

On the downside, the Biotech Index
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BTK |
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closed firmly below its 200-day moving average yesterday. We initially pointed
out the relative weakness in this sector several weeks ago, but it has since
been totally devoid of any buying interest. Because the year-long uptrend in
that sector has clearly been broken, both the Biotech HOLDR
(
BBH |
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iShares Nasdaq Biotech
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We also are stalking the Oil Index ($XOI), not to be confused with the stronger
Oil Services Index
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confirmation yet, but we are waiting to see if the index forms a “lower high” on
its daily chart, which seems likely considering that many of the stocks in that
sector have bounced on much lighter volume than they sold off last week. If we
see a “lower high” shaping up, we will look for short setups in that sector, but
the signal to sell short has not yet presented itself.

Both the S&P and Dow technically closed yesterday at new
multi-year highs, but failed to break out above their previous intraday highs
from last month. Undoubtedly, relative weakness in the Nasdaq has been
preventing both indices from breaking out of their ranges. For the second
consecutive day, the Nasdaq Composite closed below its 50-day moving average,
but above support of its prior low from April 17. That same support level of
2,300, which we illustrated yesterday, is an important area to watch going into
today. With the Nasdaq weighing so heavily on the broad market, you probably
want to avoid long positions in the tech arena. Instead, consider buying
breakouts in the Utilities and Banking sectors, two of the strongest sectors in
the market right now.