Which ETFs Are Primed To Rally? (XBI) (XRT)- January 4, 2012

Jan. 04, 2012 9:28 AM ETXBI, XRT
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The Wagner Daily - January 4, 2012
Concise technical analysis and picks of the leading global ETFs


Stocks surged higher across the board on Tuesday on strong trade. All five major indices closed well in the black, with large cap issues leading the advance. By the closing bell the Nasdaq, S&P 500 and the Dow Jones Industrial Average posted gains of 1.7%, 1.6% and 1.5% respectively. The small-cap Russell 2000 also tacked on 1.5%, while the S&P MidCap 400 gained the least, at 1.0%.

Market internals were positive on both exchanges yesterday. As might be expected in the first post-holiday session, volume was significantly higher across the board. However, turnover was still below the 50-day moving average on both exchanges. Volume ended the session up by 57.0% on the Nasdaq and 58.0% on the NYSE. Advancing volume was higher than declining volume by 4 to 1 on the NYSE and 5 to 1 on the Nasdaq. It's probably safe to conclude that Tuesday was an accumulation day for the big cap indices but the picture is not as clear for mid and small cap issues. Basically, the majority of Tuesday's gains were a result of the gap up and not intra-day price action. The DJIA, S&P 500 and Nasdaq all broke out above recent trading ranges and held the gap (Albeit, they closed near intraday trading lows). However, both the Russell 2000 and the S&P MidCap 400 fell back into their respective trading ranges, with the mid-cap index filling its gap.

The charts below provide an excellent visual of the key resistance levels now facing the major indices. Notice that the DJIA is showing the most strength and faces the least resistance as it rallies to the highs set last summer. However, the Nasdaq, Russell 2000 and S&P MidCap 400 indices face formidable resistance between current levels and the highs of last year.

December 30th, the SPDR S&P Biotech ETF (XBI) formed a reversal candle as it reversed off of intraday lows, on high volume, to close just below the 200-day MA. Then yesterday, on very light volume, XBI printed a false breakout above the 200-day day MA. However, yesterday's light volume selloff could bode well for a long entry in this ETF. Often, after an obvious breakout level fails, an ETF will undercut a previous swing low and provide a more reliable setup. False breakouts serve to sweep stops and shake any weak hands out of the trade. The ensuing rally is the one that ends up driving the ETF to higher ground.

IYT gapped up yesterday and broke above the five minute high, so we entered the trade. However, it then spent the remainder of the session in a tailspin as it nearly filled the morning gap. We are raising the stop in IYT to just below the December 28th low. The new stop is $88.10. EUO gapped down yesterday but is holding support above the 20-day moving average, and remains well above its stop. IYZ broke out on a massive spike in volume yesterday and appears likely to move higher. Both BZQ and FXP are being removed from the watchlist, as both setups have been rendered invalid. XRT remains on the watchlist. However, please note that that new trigger, stop, and share size have been posted in the watchlist for XRT.

Although the major indices saw significant gains yesterday, the intraday price action was mixed. Many stocks opened near the highs and closed at the lows of the session. Further, it was primarily a day of bottom fishing as the worst performing industry groups performed the best. The lowest of the low, solar energy, saw the biggest gains on the session. Resource related sectors also performed well, despite being some of the poorest performers for months. Nonetheless, since three of the five major indices gapped up and held the gap, a bullish follow through day over the next several sessions could spark a big rally.

The commentary above is an abbreviated version of our daily ETF trading newsletter, The Wagner Daily. Subscribers to the full version receive specific ETF trade setups with detailed trigger, stop, and target prices, as well as daily updates on all open positions. Intraday Trade Alerts are also sent via e-mail and/or text message, on as-needed basis. For your free 1-month trial to the full version of The Wagner Daily, or to learn about our other services, please visit morpheustrading.com.

Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also 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. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to: deron@morpheustrading.com.

DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

Charts created by TradeStation (tradestation.com).

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Reproduction without permission is strictly prohibited.

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