Stocks wrapped up an indecisive week on a positive note last Friday, as the major indices logged substantial gains. After gapping higher on the open, the broad market initially trended north, but stocks reversed course after the first hour of trading. It looked a bit shaky when the main stock market indexes fell to their morning lows by mid-day, but the bulls returned in the afternoon. Blue chips led the way this time, sending the Dow Jones Industrial Average to a 1.7% gain. The Nasdaq Composite climbed 1.4% and the S&P 500 advanced 1.1%. The small-cap Russell 2000 and S&P Midcap 400 indices rallied 1.7% and 0.9% respectively. All the major indices closed near their intraday highs, but slightly lower for the week.

One problem with last Friday's gains is they were not driven by institutional accumulation. Total volume in the NYSE was 5% lighter than the previous day's level, while volume in the Nasdaq receded 13%. This tell us mutual funds, hedge funds, and other institutions were reluctant to participate in the buying. Furthermore, volume in both exchanges limped in to its lowest weekly levels since the last week of December 2007. The week between Christmas and New Year's Day is typically the slowest of the year. Last week wasn't much better, and trading is likely to remain depressed until after the September 1 Labor Day holiday.

In the August 22 issue of The Wagner Daily, we suggested the healthcare sector was finished with its short-term correction, and that the various ETFs were poised to resume their uptrends. As expected, the healthcare ETFs indeed rallied that day, and are positioned to retain their leadership in the coming week. Within the broad healthcare arena, medical device manufacturers have been showing the most relative strength. The sole ETF that tracks that sub-sector of healthcare is iShares U.S. Medical Devices (IHI). While other healthcare ETFs "undercut" support of their 20-day exponential moving averages (EMAs) last week, IHI pulled back to its 20-day EMA, then bounced perfectly off of it. IHI also finished the week just a few cents shy of its all-time closing high of $63.00; last Friday's intraday high was $62.94. The daily chart of IHI, which should break out to a new high in the coming days, is shown below:



Though we do not have a position in IHI, we are still long the iShares U.S. Healthcare Sector Index (IYH), which bounced off major support of both 20 and 200-day moving averages last Friday. Our other position in the sector, iShares Nasdaq Biotechnology (IBB), has become a bit of a laggard. Nevertheless, it is still holding support of its "swing low" from August 8, and closed the week right at its 20-day EMA. The high volatility of biotech stocks means greater profit potential for IBB, but it also means the swings in both directions may be greater than those of ETFs comprised of large cap, slower moving pharmaceutical stocks.

A different sector ETF presenting a buying opportunity with its recent pullback is PowerShares Water Resources (PHO). It recently retraced to test support of its 20-day EMA, then finished last week just above that key level of near-term support. Opposite of the biotech ETFs, PHO is a slow mover with low-volatility. The PHO pullback is shown on the daily chart below:



As we enter one of the traditionally slowest weeks of the year, the main stock market indexes continue to exhibit mixed signals. The Nasdaq Composite bounced off support of its intermediate-term uptrend line last week, but now must contend with resistance of its 200-day MA. It's positive that the S&P 500 and Dow Jones Industrial Average both reclaimed their 20 and 50-day moving averages, but a lot of overhead supply remains from earlier in the month. With the major indices essentially in "no man's land," expect continued chop and whippy price action. Unfortunately, the anticipated indecision may be compounded by the fact that turnover will likely remain well below average levels until the Labor Day holiday has passed.

We probably won't see the real direction of the market's next move until traders and investors begin returning to their desks in the beginning of next month. Until then, it makes sense to take it easy with regard to entering new positions. Realize that the best traders are typically out of the market more than they're in the market, meaning they carefully pick their opportunities to strike, while laying low the rest of the time. This prevents them from churning their accounts and giving back profits during the more challenging periods. The coming week is probably one of those times to lay low. Simply setting stops on existing positions and taking a one-week break from trading is certainly not a bad idea. Rather than trading through this slow period, consider using the extra time to thoroughly scan the market for new opportunities in September. Then, you too will be fresh and ready to strike when the moment is right!

Open ETF positions:

Long - IYH, IBB, DXD
Short - (none, but DXD is a bearish position)

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.