Shaking off early weakness following the previous day's breakout to new highs, stocks recovered to close with mixed results yesterday. The major indices chopped around in negative territory throughout the morning session, reversed at mid-day, then drifted higher in the afternoon. The S&P 500, down 0.6% at its intraday low, eked out a closing gain of 0.1%. The Nasdaq Composite and Dow Jones Industrial Average both advanced 0.3%. Small and mid-cap stocks lagged behind again. The Russell 2000 and S&P Midcap 400 indices slipped 0.1% and 0.2% respectively. Showing resilience into the close, the main stock market indexes finished at their best levels of the day.

As commonly occurs on consolidation days, turnover receded across the board. Total volume in the NYSE was 15% lighter than the previous day's level, as volume in the Nasdaq eased 12%. Even though the S&P and Nasdaq registered a bullish "accumulation day" by gaining on higher volume on Monday, it's been 11 days since the Nasdaq printed above average volume. Overall, trade remains slow and reminiscent of the summer doldrums. With the Thanksgiving holiday on tap next week, volume has a very good chance of remaining lethargic through the end of the month. When heavy institutional trade eventually returns to the market, it will be important to observe the broad market's price direction that accompanies the increased turnover.

Many industry sector ETFs that have been following the major indices are starting to appear technically "overbought" on a short-term basis. Nevertheless, this certainly does NOT mean they can't continue moving substantially higher without pulling back. Still, entering most of these ETFs at current levels now becomes a simple matter of analyzing the reward-risk ratio. Even if these ETFs continue higher, we're not very interested in buying if the potential upside reward is not at least twice as great as the required stop loss to the downside. Instead, we would opt for putting these strongest ETFs onto on a watchlist for potential buy entry on the next broad market pullback to support.

Over the past week, we've been observing stealth relative strength in a few sector ETFs that were formerly not doing much of anything, or even lagging the market. On a longer-term basis, their relative strength versus the broad market is still low. However, these ETFs may provide short-term traders with a profitable, momentum-based pop in the coming days. Since these ETFs with newly developing relative strength have generally been out of sync with the direction of the broad market, there is perhaps a lesser chance of a sharp reversal lower if the major indices suddenly pull back as well. The first ETF on our radar screen is S&P Homebuilders SPDR (XHB). Below are the daily and weekly charts:





On the daily chart (the first one above), notice that XHB is trying to confirm the breakout out above its downtrend line from the September 2009 high, which would also correlate to a breakout above the 50-day MA (the teal line). XHB has been choppy and indecisive over the past week, but a rally above its high of the past five days (over the $15.50 area) should spark near-term buying momentum. The second chart (weekly time interval) shows that XHB reversed higher after coming into support of its uptrend line off the March 2009 low.

Aided by the continuation of a weak dollar, agriculture ETFs have begun waking up. Of the group, the leveraged DB Agriculture Double Long (DAG) has the best pattern and relative strength. The daily chart of DAG is shown below:



Unlike most ETFs, the performance of DAG is more likely to be affected by movements in the U.S. dollar, as opposed to rallies or sell-offs in the equities markets. As such, a position in DAG may be ideal for investors and traders who are seeking long exposure right now, but also desire low correlation to the direction of the S&P, Dow, and Nasdaq. In this regard, another ETF to monitor for possible buy entry is the U.S. Oil Fund (USO), which is designed to roughly track the price of the crude oil commodity. The daily chart of USO is shown below:



On October 15, we bought USO when it broke out above a key band of horizontal price resistance. But even though our breakout entry was ideal, the U.S. dollar started to bottom at the same time, thereby keeping in check the potential for large gains. As such, we made a judgment call to sell USO for a small gain on October 29. On November 10, we attempted a re-entry into USO, as it appeared to be breaking out above its short-term, downtrending channel that developed after the mid-October breakout. However, due to lack of immediate follow-through, we ditched the trade for a scratch on the same day as entry. All of this leads us to the question of whether or not USO will successfully break out above the upper channel of its nearly month-long downtrend on this next attempt. As the chart above illustrates, USO may be good for another re-entry attempt on a breakout above the upper channel of the downtrend, especially now that it has successfully tested and held support of its prior breakout level (circled in pink).

As I write this, I'm on a plane headed to Las Vegas, in order to attend the International Traders Expo. I always look forward to the semi-annual expo, as it gives me the opportunity to see what's new in the industry, network with associates and friends, and teach. This time, I'm not scheduled to conduct any "official" workshops or presentations at the expo. However, I will be conducting a Live ETF Trading Workshop on Friday, November 20, from 1:30 to 5:30 pm (click here for details and to register). Even if you don't attend the workshop, I always enjoy meeting subscribers face to face, so feel free to drop me a line if you'll be at the Vegas Expo.

Open ETF positions:

Long - (none)
Short - RKH

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.