Bullish Setup in this Pharma ETF

Stocks showed a bit of optimism ahead of today's Fed announcement on economic policy, although turnover fell below average levels. The S&P 500 broke its three-day losing streak by posting a gain of 0.6%, as the Nasdaq Composite and Dow Jones Industrial Average both advanced 0.3%. The small-cap Russell 2000 and S&P Midcap 400 indices each rallied 0.6%, causing the latter to close at a fresh all-time high. Each of the major indices finished near their intraday highs.

As we often see ahead of Fed days, volume tapered off in both the NYSE and Nasdaq. Total volume in the NYSE declined by 1%, while volume in the Nasdaq was 7% lower than the previous day's level. It was the fourth straight day of lower turnover in the Nasdaq, and also the lightest volume day of the calendar year. Volume receded below 50-day average levels in both exchanges, indicating traders and investors were waiting for today's Fed comments before making any big bets on the direction of the market.

One ETF that is setting up nicely for potential follow-through on the long side is the Pharmaceutical HOLDR (PPH | Quote | Chart | News | PowerRating). On January 19, PPH broke out to close at a new 52-week high, but it drifted back down into the range the following day. However, rather than the breakout failing, PPH subsequently began to consolidate in a tight range above its 20-day MA, just below the breakout level. After finding support at the 78.70 area over the past six days, PPH closed yesterday right at resistance of its short-term downtrend line. This is illustrated on the daily chart of PPH below:

With the primary uptrend remaining intact and support being established at the 78.70 area, PPH has a good chance of breaking out above its short-term downtrend line in the next day or two. If it does, it should rapidly zoom higher to at least test its January 19 high. If the broad market remains solid, we would expect momentum to carry it to a fresh 52-week high. As you can see, a rally above yesterday's high is the basic entry point for buying PPH, but it is safer to wait until after we see the market's reaction to the 2:15 pm EST Fed announcement.

Until recently, the Biotech HOLDR (BBH | Quote | Chart | News | PowerRating), a cousin to PPH, also had a nice chart pattern we were stalking for long entry. However, it gapped down sharply on January 26 and failed to immediately recover. As such, we no longer like the setup because the retracement was too sharp and it is now trading below its 20-day MA. Notice how much overhead supply (resistance) BBH must deal with in order to move back to its high:

Yesterday's broad-based gains gave the S&P and Dow a little more "wiggle room" above their 50-day MAs, but the Nasdaq Composite is just waiting for the chance to have some resolution. The Nasdaq has touched its 50-day MA in seven of the past eight days, but has not moved far on either side of it. So far, the 50-day MA has been acting like a magnet, but the market's reaction to the Fed announcement will likely to be the catalyst that enables the index to make a decisive move away from the 50-MA. Be prepared for a swift move in either direction this afternoon, and lay low with new positions ahead of the Fed.

Open ETF positions:

Long QID, GLD (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)


Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is 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. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron's other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .