Stocks concluded last week's session on a rather bright note, as the major indices motored to new "swing highs" within their developing uptrends. Roaring back from the previous day's losses, the S&P 500 gained 2.4%, the Nasdaq Composite 2.5%, and the Dow Jones Industrial Average 2.7%. The small-cap Russell 2000 and S&P Midcap 400 indices climbed 2.9% and 2.2% respectively. Each of the main stock market indexes finished at its highest level of the day and week, positioning the stock market for bullish momentum to start the new week.

The percentage gains of last Friday's broad-based advance were certainly impressive. However, it's important to note the major indices broke out on lighter volume. Total volume in the NYSE declined 6%, while volume in the Nasdaq was 1% lower than the previous day's level. With such massive gains, one would have expected higher turnover to confirm the gains, especially considering the technical significance of the major indices breaking out above their prior highs from last month. Further, volume in both exchanges was even below 50-day average levels. When stocks are rallying on light volume, it only takes one session of institutional selling to undo a string of gains. As such, last Friday's mediocre market performance "under the hood" keeps our bullish enthusiasm a bit restrained going into today.

Despite continued improvement in the overall bias of the broad market, there are still a rather limited number of bullish ETF chart patterns. This is primarily because most ETFs are rallying off their recent lows, and still remain below their 20 and/or 50-day moving averages. In those instances, the abundance of overhead supply usually leads to choppy, indecisive trading. Instead, we've been looking for ETFs trading above their 20, 50, and 200-day moving averages, as well as those that are near their 52-week highs.

Due to institutional rotation of funds into the sector, Healthcare-related ETFs are still showing the most relative strength. iShares Medical Devices (IHI), which we initially discussed in the August 6 issue of The Wagner Daily, broke out to a fresh all-time high last Friday. iShares Health Sector Index (IYH), which we bought on August 5, rose 2.2% to a new multi-month high last Friday. Biotechnology ETFs, with tickers including BBH, IBB, and XBI, corrected sharply on August 7, but raced back convincingly the following day. After last week's shakeout, the biotech ETFs could break out to new highs this week. If they do, a rally above the highs of their recent consolidations would present ideal buy points to enter or re-enter the sector.

If buying only one sector in the market, healthcare (biotech, medical devices, pharmaceuticals) may be the best place to deploy your funds right now. However, transportation is another industry that's starting to pop. Last Friday, we initiated a new long position in iShares DJ Transportation (IYT), after it rallied above resistance of its recent consolidation. Moreover, it is also trading above its 20, 50, and 200-day moving averages, so there is much less overhead resistance to contend with. At just 5% below its all-time high, it would not take a lot of buying pressure in the broad market for IYT to zoom back up to test that level. The daily chart of IYT below illustrates the breakout:



As we entered IYT last Friday, we closed two winning ETF positions. We sold our long position in Ultra Russell 2000 ProShares (UWM) into strength, as it rallied into resistance of its 200-day moving average. We locked in a gain of nearly 10% (4.7 points) since our July 29 buy entry. Though the Russell 2000 broke out to a new "swing high," we took the easy route to secure a strong gain because the 200-day MA may keep further gains in check, at least in the near-term. In addition, we sold our long position in PowerShares U.S. Dollar Fund (UUP) because it rallied to our original price target a few minutes after the open. We realized a gain of 5% (1.2 points) on the UUP trade, but the capital gain was nearly the same as the profit from the UWM trade. This is because our share size in UUP was correspondingly higher, in order to compensate for its lower volatility.

The S&P 500 and Dow Jones Industrial Average rallied to close above their July 23 highs, thereby setting new "swing highs" within the context of their uptrends off the mid-July lows. While this is technically bullish, we're still playing it cautiously going into today. As mentioned above, the lighter volume of Friday's breakout is a moderate concern. Further, neither index closed by a wide enough margin above their prior highs to convincingly declare a breakout. Finally, both the S&P 500 and Dow Jones Industrial Average are now toying with their 50-day moving averages. In strongly trending markets, such as the May 2008 to July 2008 downtrend, the first countertrend move to the 50-day MA often presents a serious level of resistance (or support if an uptrending market). As we start the new week, our near-term bias is cautiously bullish, but our intermediate-term bias is neutral. Based on the primary downtrends still being intact, our long-term bias is bearish. Trade what you see, not what you think!

Open ETF positions:

Long - IYH, IYT, TAN
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.