Potential Buy Entry In This Biotechnology ETF (IBB, UYM, IWM, QQQ, SPY, DIA)

Equities advanced for the second straight day but on lower trade. Unlike Wednesday however, stocks held their ground to finish near session highs. For the second time in as many days the small-cap Russell 2000 (NYSE:IWM) led the market higher as it tacked on an impressive 1.5%. The S&P MidCap 400 added 0.9% while the Nasdaq (NASDAQ:QQQ) ended the day up 0.8%. Both the Dow Jones Industrial Average (NYSE:DIA) and the S&P 500 (NYSE:SPY) underperformed as they posted gains of 0.1% and 0.4% respectively.

Market internals ended the session mixed. Volume was down across the board. Turnover on the NYSE dropped by 9.4% while it closed fractionally lower on the Nasdaq. Advancing volume outperformed declining volume by a factor of 2.8 to 1 on the NYSE and 3.1 to 1 on the Nasdaq. The drop in volume suggests a lack of institutional participation in yesterday’s advance and eliminated the possibility of a follow through day for the broad market.

The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) has been consolidating along its 20-day EMA since breaking above the previous trading range on April 26th. On May 25th this ETF significantly undercut its two day low but rebounded quickly to reenter the trading range. The undercut serves to “shake-out” the weak hands and draw shorts in to fuel a potential rally. An ideal situation would be for IBB to form an inside candle on light volume today. This price action would provide a long setup on a move back above resistance at $107.80.

On a sharp reversal move on May 11th the ProShares Ultra Basic Materials ETF (NYSE:UYM) reversed sharply and closed below its 50-day moving average. This price action resulted in more selling of this ETF and a loss of support. Since then UYM has climbed its way back into resistance at the 20-day EMA. An overcut of this key mark followed by a return to the two day range could present a shorting opportunity in UYM.

The broad market is now approaching resistance. We will be watch closely to determine if the recent loss of support was just an undercut of the 20-day and 50-day moving averages or a short term trend reversal. We will be watching closely for a potential pattern similar to those suggested for IBB or UUM in today’s newsletter. An overcut or undercut formation will likely provide an important clue to the next move in the market.

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: [email protected]

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