Yesterday’s relative strength exhibited by the NASDAQ was just one instance of the changing of guards that may be taking place.Within the NASDAQ, one industry sector that appears poised to make a substantial intermediate-term move to the upside is semiconductors. Specifically, we like the bullish setup that Market Vectors Semiconductor ETF ($SMH) is now presenting. For starters, take a look at the long-term monthly chart of $SMH below:

As we have mentioned in prior reports, price action is always king, so until market leadership clearly breaks down our bias must be on the long side. With that in mind, we have a several new buy setups on today’s watchlist. One new ETF setup is in the First Trust DJ Internet Index Fund ($FDN), which broke out from a year and a half long consolidation in January. After stalling out around 44.00, $FDN has formed a flat base with a shallow correction and gentle pullback to the rising 10-week MA. This is the type of basing action we like to see after a breakout from a long base.

Transports, financials, and energy stocks have shared the leadership role during the current rally in the S&P 500. While Energy ETFs like $XLE are currently not extended, transports and financials are, but the Direxion Daily Financial Bull 3X ($FAS) is still in good shape, forming a bull-flag type pattern on the daily chart.

Stocks finished up a choppy week of trading on a positive note last Friday, as the main stock market indexes gained an average of 0.7%. Total volume in the NYSE was lighter than the previous day’s level, but turnover in the Nasdaq ticked slightly higher. Given that the most recent leg of the broad market rally has lacked volume on most of the “up” days, Friday’s accumulation day in the Nasdaq was positive. All the major indices closed at their intraday highs, and near their best levels of the week. Still, all the broad-based indices registered modest losses for the week.

In market environments such as the present, we lower risk in one of two ways. First, we intentionally size the positions so that each new swing trade entry is significantly lighter than than our maximum risk parameter of $500 per trade (based on our model portfolios). The other option is to not assume much overall risk exposure in the portfolio. We have been doing both of these things ever since the March 5 buy signal; nearly every trade entry has been around 50% of maximum risk per trade, and we’ve also not been exceeding more than about 40% of the model portfolio’s cash value. Over the next few days, we will be closely monitoring the price action in the S&P 500 Index, which has been showing leadership compared to the NASDAQ for several months. As annotated on the daily chart below, the S&P 500 SPDR ($SPY) is nearing a key near-term level of price support. If the lows of the past two days in $SPY are breached, it would be indicative of a failed breakout to new highs. With two or more distribution days, our stock market timing system could soon revert back to a “sell” signal.

Our long position in $XOP held support of the 10-day MA once again and could be poised to resume its uptrend with a move above 61.40. $XME rallied into resistance of the 20-EMA on the hourly chart, which is an important level to monitor when evaluating the health of a trade on the short side. Note: The $ITB setup is a BUY LIMIT ORDER, which means we are looking to buy on weakness only if our trigger is hit at 24.45. This is not a buy stop order. iShares Dow Jones U.S. Medical Devices Index ($IHI) broke out from a long term base of consolidation in early January and rallied about 7% higher before stalling out. Since then it has formed a tight, six week base near 52-week highs.

Stocks sold off on increased volume producing a bearish distribution day for the Nasdaq and S&P 500. The only positive to come out of yesterday’s selling was that once again buyers stepped in during the last 90 minutes of trading to lift the averages off the lows of the day. Looking at a daily chart of the S&P 500 ETF ($SPY) below, there is a cluster of support in the 153.00 – 154.00 area:

Our long position in $XOP held up well yesterday closing above 61.00. The 10-day moving average is catching up quickly and should provide support within the next few days. On the short side, $XME once again stalled at resistance from the 20-day EMA and backed off. A break of Monday’s low would put the price action below all the major averages on the intraday and daily charts. After a false breakout attempt above 23.93 late last week, the iShares Dow Jones US Home Construction ($ITB) recovered nicely off the 10-day moving average on Monday. Although we would prefer a two to five bar pullback to the 20-day or 50-day moving average as a low risk entry, $ITB could simply trade in a tight range and attempt to breakout again within the next few days. A short-term pullback would help to work off the V-shaped basing pattern formed by the sharp selloff from 2/20 to 2/25 and quick recovery from 2/26 to 3/6.

Although $TBF did not yet trigger for buy entry, it remains on our watchlist going into this week because last week’s price action was indicative of bullish consolidation. The price traded in a tight and narrow range, near the previous week’s high, as volume declined. Therefore, we still like this setup for buy entry if it moves above the high of the past two weeks. An updated weekly chart of $TBF

Going into yesterday, we had three ETFs on our watchlist for potential swing trade entry ($TBF long, $XOP long, and $XME short). Of these, both $XOP and $XME traded through our trigger price for entry, giving us two new open positions in our model ETF portfolio. Showing major relative strength to the broad market, the energy sector was one of the strongest industry groups yesterday. This enabled $XOP to rally above its two-day high, trigger our buy stop for entry, and then cruise nearly a full point higher after our entry. Considering the benchmark S&P 500 rose just 0.6% yesterday, the 2.7% intraday gain of $XOP was rather impressive. Most importantly, it was a good sign that we were targeting the right sector with relative strength.