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Continued improvement in market sentiment (SMH, IYZ) - September 27, 2010

|Includes: IYZ, SMH, Philadelphia Semiconductor Index (SOX)
All of the major indices closed well in the green on Friday. The market gapped up significantly, rallied throughout the session and finished near the highs of the day. The small-cap Russell 2000 led the charge posting a whopping 3.4% gain. The S&P MidCap 400 rallied 2.5%, while the Nasdaq finished up 2.3%. The S&P 500 and Dow Jones Industrial Average managed lesser, but still significant gains of 2.1% and 1.9% respectively. Although they were the biggest gainers on Friday, the S&P MidCap 400 and Russell are slightly lagging the other major indices. The MidCap 400 is trading just at its 3 month high, while the Russell 2000 is about 1.0% off its highs of the timeframe.

Although the broad market rallied sharply, the increase in volume was not as impressive, but still the internals were strong. Volume on the NYSE increased 11%, while the Nasdaq realized an increase of 3.4%. The advancing volume to declining volume ratio was quite impressive on both indices. Advancing volume overwhelmed declining volume by 9.5 to 1 on the NYSE and 7.2 to 1 on the Nasdaq. When combined, the market internals provide substantial evidence of institutional accumulation. This is further supported by the clear break above resistance on three of the five major indices.

On September 23rd, we issued an intraday alert to exit our SSG position, due to a sharp reversal of the Semiconductor Index ($SOX). Although SSG did not hit our stop, we exited the trade with a modest loss. This "judgment call", demonstrates the importance of being proactive when market conditions change abruptly. The sudden reversal in the $SOX served as a red flag, and suggested that it was better to neutralize the position than to wait for it to hit our stop. The accompanying volume spike in the Semiconductor HOLDRs (NYSEARCA:SMH) further supported our decision. On Friday, the SMH rallied and closed well above its 200 day moving average, while the $SOX closed just below its 200 day moving average. Although the $SOX is coming into resistance at the 200 day MA and the downtrend line that began in April (see chart), a trend reversal may be at hand. This would not be a surprise, since all the major indices are at or above key resistance. Just as important, we are now out of position that would have hit our stop anyway, and better poised to evaluate the next move.





The Dow Jones U.S. Telecommunications Sector Index Fund (NYSEARCA:IYZ) is showing signs that it is prepared for another leg up. Since July it has been in a clear uptrend. On September 20th it broke out of a 5 day consolidation pattern. Since breaking out, it retested its former resistance, and is now consolidating near the highs of the breakout. A volume fueled rally above $21.85 would serve as a potential level for a buy entry. An alternative buy trigger would be a pullback into the 20-day exponential moving average.





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.




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