When The Market Rallies, This Sector Will Perform

In keeping with the pattern of the
past week, the broad market once again showed a
great deal of intraday indecision and erratic behavior, but this time the major
indices closed lower. After selling off sharply throughout the morning, then
recovering back to flat in the afternoon, stocks sold off moderately during the
final hour. The roller-coaster action resulted in a 0.3% loss in the S&P 500 and
a 0.5% drop in the Dow Jones Industrials. The Nasdaq Composite
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closed only 0.2% lower and continued to hold above its 50-day moving average.
Both the S&P 400 Mid-Cap and Russell 2000 Small-Cap indices shed 0.3%. The major
indices again closed near the middle of their intraday ranges, confirming the
indecision.

Total volume in the NYSE increased by 4% yesterday, while
volume in the Nasdaq was 1% lighter than the previous day. The increase in NYSE
volume combined with yesterday’s losses registered the session as a bearish
"distribution day." However, volume in both exchanges remained well below
average levels. Turnover in both exchanges has only exceeded its 50-day average
level in one of the past ten sessions, which is typical of the "summer
doldrums." Like the previous day, market internals in both the NYSE and Nasdaq
were mixed throughout the session, but declining volume moderately exceeded
advancing volume by day’s end. While market internals typically give us a good
indication of what is happening "beneath the surface," an accurate analysis is
difficult when volume levels are so low. Proof is that internals have been
reversing from session to session.

In yesterday’s Wagner Daily, we briefly discussed the
potential long setup in
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we netted a gain of approximately 15 points on the last big move in BBH, back in
July, then closed the position to allow it time to correct. Rather than
correcting by price and retracing significantly, BBH appears to be correcting by
time instead. The weekly chart of BBH shows a tight, sideways consolidation over
the past month. Notice also how BBH is coming into support of its weekly uptrend
line (the blue line), which began with the low of March:

The fact that BBH did not sell off with the broad market
throughout the month of August means the sector is showing relative strength as
well. Therefore, we expect the Biotechs to be among the first sector to rally
when/if the market does so. Our buy point in BBH will be above the daily
downtrend line that began with the August 3 high (subscribers are provided
trigger, stop, and target prices in the "watchlist" below). A break of this
downtrend line also corresponds to a breakout above the 20-day moving average.
The shorter-term daily chart below illustrates this :

The S&P 500
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for the first time since May 16 yesterday, but the index is still holding within
its recent trading range. This, along with the fact that the Nasdaq is still
above its 50-day MA, means it is still too early to aggressively short
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(S&P 500). Furthermore, the Nasdaq has entered a volatility contraction as it
trades in a narrow range just above its 50-day MA. The longer the volatility
contraction continues, the greater the eventual move will be, but the big
question is which way it will go. Watch for the Nasdaq to soon break out of the
narrow range shown on the daily chart below:

Yesterday was another clear example of why we have been
advocating a mostly cash position in the short-term. Attempting to predict the
next direction of the major indices will only result in overtrading and churning
your account. We hate to sound like a broken record, but the market’s recent
action speaks for itself. Do yourself a favor and wait for the market to shows
its hand, then you can simply trade in that same direction, whichever way it
eventually goes. Being positioned mostly in cash will enable you to quickly
react so you can profit from the market’s eventual breakout or breakdown. We’ll
be ready to buy or sell short the broad-based ETFs when the signals are there,
but we will remain patient until that occurs.

Open ETF positions: