Stay Above the Fray with These Three Sectors

Stocks got off to a wild start after the emergency rate cut on Oct. 8, but several industry sectors have shown relative strength to the major indices and have begun to exhibit signs of at least forming a short-term bottom. As such, there are now a few short-term setups on the long side that may be in play next week.

Sector ETFs showing early signs of bottoming include: basic materials (metals and mining), agriculture/fertilizers, oil service and gold mining. Click here for a list of specific, tradable ETF tickers in each of these sectors.

Comprised of a basket of gold-mining stocks, Market Vectors Gold Miners (GDX - commentary - Cramer's Take) rocketed 14.2% on Oct. 8. Confirming the strong percentage gain of GDX, more than 10 million shares also changed hands, nearly double its average daily volume.

Market Vectors Gold Miners

Click here for larger image.

Source: TradeStation

On the daily chart of GDX above, notice the "undercut" of support that occurred on Oct. 6. Such price action is representative of shaking out the remaining "weak hands," which subsequently enables the ETF to move higher. GDX has begun to form a "double bottom" pattern, but still must contend with overhead resistance of its 20-day exponential moving average (EMA), as well as its 50-day moving average (MA).

Over the next several days, I'd like to see GDX consolidate in a tight, sideways range. If it does, I will consider buying a subsequent breakout above that range over the $32 level.

For now, however, I have merely added it to my ETF watchlist, as it's too early to jump into based on just one day's price action, especially considering the broad market's whippy behavior.

Even though the basic-materials index is trading near a 52-week low, the sector began demonstrating relative strength to the broad market on Oct. 8. Showing an impressive gain of 8.5% at its intraday peak that day, the S&P Select Sector Materials SPDR (XLB - commentary - Cramer's Take) sold off in the final minutes of trading, but still managed to close 3.2% higher (compared to a 1.1% drop in the S&P 500). Turnover in XLB also spiked to 250% its average daily volume, pointing to institutional accumulation.

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At the time of publication, Wagner was long the CurrencyShares Japanese Yen.

Deron Wagner is the founder and head trader of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his trading methodology with The Wagner Daily, The MTG Stalk Sheet, and The Wagner Weekly newsletters.