After recent losses in the stock market, it may be easy to get excited about Thursday's bullish reversal and strong gains. But be aware that, including yesterday, there have been three such days of massive gains within the past month.
Recall that the S&P 500 rallied 11.6% on Oct. 13, and 10.7% on Oct. 28. What was the outcome of those days? Both times, the S&P 500 fell back to its prior lows just two weeks later. If the same thing happens again, the major indices should follow through with a confirmed move to new multiyear lows.
Nevertheless, the scenario may play out differently this time. Yesterday's "undercut" below the October 2008 lows was bullish, because it caused the remaining bulls to throw in the towel. It's at such pivotal moments in the market, when even the die-hard bulls finally give up hope, that significant bottoms of bear markets are often formed. Below, the daily chart of the S&P 500 SPDR (SPY - commentary - Cramer's Take) illustrates the "undercut:"
A vast majority of industry sector and international ETFs have chart patterns similar to those of the major indices, meaning they tested their October lows and reversed yesterday. As such, there's not yet any clear bullish divergence or relative strength that gets me excited to buy here. But one ETF on my radar for a potential buy entry is the Merrill Lynch Biotech HOLDRS (BBH - commentary - Cramer's Take), which is poised to break out above its intermediate-term downtrend line:
Circled in blue are a plethora of indicators near the current price of BBH. Most importantly is the convergence of the multimonth downtrend line (the red dashed line) and the 50-day moving average (the teal line). At present, this is acting as resistance, but a rally above this point of convergence is the trigger for a buy entry into BBH (above the $175 area). The 200-day moving average (the orange line) is also just overhead; a breakout above this moving average should significantly shift the bias in BBH. Below, the 20-day exponential moving average (the beige line) is acting as short-term support for BBH. Most importantly, BBH has been showing relative strength to the broad market by moving sideways to higher over the past month, while the major indices were moving sideways to lower.
ETFs Short ETFs Can Work for the Vigilant Bear 11/11/2008 11:46 AM EST This can be a good choice for small investors who feel the market will fall - but keep an eye on it.
ETFs Good Time to Go to the Gold Mine 11/5/2008 2:29 PM EST This gold-mining ETF should benefit from new political leadership and persistent inflation.
At the time of publication, Wagner had no positions in the ETFs mentioned.
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.
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