Bullish on Energy (DIG) and Chips (SMH)

03/06/2009 12:01 am EST

Focus: ETFS

Michael Paulenoff

Consultant and Publisher, MPTrader.com

For better or worse, to participate in another potent recovery rally, our model trading portfolio positioned long in energy—like the ProShares Ultra Oil & Gas ETF (NYSE: DIG)—and in the semiconductor sector, rather than in the major equity market ETFs, such as the SPY's, Q's, or DIA's.

My technical work argues that the energy sectors are bottoming/turning, while the semiconductor group—represented by the Semiconductor HLDRs ETF (AMEX: SMH)—as a subset of the larger QQQQ technology sector, exhibits impressive relative strength.

For those of you who are otherwise inclined to use the major equity market ETFs to participate in a recovery rally, be aware that the S&P 500 Depository Receipts (AMEX: SPY) have a double low at 68.75/80 this week, while the PowerShares QQQ (Nasdaq: QQQQ) have a "stepped up" double low at 26.17/52. Both major market ETFs may be putting in significant secondary lows.

To the extent the double lows hold, the SPYs and the Qs are positioned for a very reasonable risk-reward long side opportunity, as long as the lows (give or take a 0.5% break of the lows) remain intact.

All eyes will be fixated on the unemployment report at 8:30 am ET, which will be bad, but could be disastrous. In other words, taking the positions ahead of the announcement will involve an entirely new level of risk tolerance and intestinal fortitude.

By Mike Paulenoff of MPTrader.com

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