Health Care ETF (XLV) Looking Like a Buy

05/28/2009 12:01 am EST

Focus: ETFS

Deron Wagner

Founder and Head Portfolio Manager, Morpheus Trading Group

One sector that has started showing relative strength to the broad market is health care. Typically, this sector is viewed as "defensive" in nature, so it often has a tendency to see positive money flow when the broad market is weakening. Yet, the health care arena is also showing strength when the major indices rally. This has created a few ETF setups we're monitoring for potential buy entry. S&P Health Care SPDR (XLV) is one such ETF we're stalking. Its daily chart is shown below:

The iShares Nasdaq Biotech (IBB) has been choppier, but it too is nearing a potential breakout level that could generate substantial upside momentum in the short term. Take a look:

On a completely different note, the PowerShares G10 Currency Harvest Fund (DBV) is showing an interesting chart pattern that has the potential for an explosive (relatively speaking) move to the upside. If you're not familiar with this unique ETF, here's a description of it, straight from the Web site:

"The PowerShares DB G10 Currency Harvest Fund is based on the Deutsche Bank G10 Currency Future Harvest Index - Excess Return™ (Index) and managed by DB Commodity Services LLC.”

“The Index is comprised of currency futures contracts on certain G10 currencies and is designed to exploit the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative to currencies associated with relatively low interest rates. The G10 currency universe from which the index selects currently includes US dollars, euro, Japanese yen, Canadian dollars, Swiss francs, British pounds, Australian and New Zealand dollars, Norwegian krone, and Swedish krona. Ordinary brokerage commissions apply." Below is the daily chart of DBV:

The price of DBV is now being squeezed between support of its ascending 50-day moving average (the teal line) and resistance of its descending 200-day moving average (the orange line). Though the 200-day MA normally wields more power than the 50-day MA, DBV has already tested that resistance level several times this month. Each subsequent test weakens that resistance level until DBV eventually gathers enough momentum to break out above the 200-day MA. Given that DBV has been consolidating in a tight range for the past several months, odds favor an upside breakout above the 200-day MA, more than a breakdown below the 50-day MA. For price confirmation, we like it for long entry on a rally above the May 19 high of $21.17. If trading DBV, a stop of just one point should be sufficient, as it has a low volatility. As such, be sure to adjust your share size high enough to account for a stop that is tighter than most other set ups.

Despite Tueday’s large gains, the technical picture of the main stock market indices has not changed. The S&P, NASDAQ, and the Dow all remain trapped in the middle of their multi-week trading ranges. Until we see a definitive breakout of the recent ranges in either direction, we cannot place much faith in the day-to-day market gyrations. Keeping a healthy portion of cash in your portfolio is a great way to prevent churning your account until the market eventually makes up its mind.

By Deron Wagner of Morpheus Trading Group

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