In yesterday’s ETF commentary, we pointed out the developing bullish setup in SPDR Energy ETF ($XLE). However, as the ETF had not yet broken out to new highs, we said it may need another week or two of consolidation, as well as tightening of the price action near its prior high. While $XLE remains on our internal watchlist as a potential buy entry in the near-term, further research enabled us to actually find a better ETFs swing trade setup within the same industry sector. Below, take a look at the daily chart of SPDR Oil & Gas Exploration and Production ETF ($XOP)…

With the market extended in the short-term, our scans have not produced much in the way of actionable, low-risk swing setups. A two to three day pullback in the major averages to or near the rising 10-day moving average would certainly help. Our focus during a potential pullback would be on ETFs that are trading above or near 52-week highs. First Trust DJ Internet Index Fund ($FDN) has been trading near 52-week highs the past few weeks while holding above the 20-day EMA (minus a quick shakeout).

The S&P 500, Nasdaq Composite, S&P Midcap 400, and Dow Jones Industrials ended the session at a new closing high for the current rally on Monday. While the market pushes higher, we continue to see problems under the hood. Volume was heavier on the Nasaq, but 15% lighter on the NYSE. The light volume move to new swing highs on the S&P 500 is not a good sign for the bulls. Aside from the heavy volume gap up to new swing highs on March 5, NYSE volume has been disappointing during the the current bounce off the swing low. While price action is always king, the light volume does not sit well with us.

With our stock and ETF swing trading strategy (click here for an overview), there are three main types of trade setups we take: breakouts above consolidation, pullbacks to near-term support (in uptrending stocks), and trend reversals. In healthy markets, we primarily focus on buying breakouts and pullbacks. However, we occasionally spot low-risk trend reversal setups, which often offer a very positive reward to risk ratio. There are two new “official” ETF swing trade setups we are targeting for potential buy entry going into today’s session, both of which are trend reversal plays. The first is ProShares UltraShort 20+ Year Treasury Bond ETF ($TBT). The technical criteria for this setup is detailed on the weekly chart.

With most stocks and ETFs running higher while the timing model was on a sell signal, there are very few low-risk buy setups to be found. However, if the market is to stage a significant rally we will eventually see new breakouts emerge and fomer breakouts pullback to support, as a strong market should have decent rotation among leadership groups. The key here is to maintain discipline and let the patterns come to us. $SPDR KBW Regional Banking ($KRE) has recently moved to new highs after a three-week pullback to support of the 10-week moving average on the weekly chart. The monthly chart below shows $KRE attempting to clear the highs of a three year trading range.

Since the morning gap up to new swing highs and follow through in the first two hours of trading on Wednesday, the S&P 500 and Nadsaq Composite have basically chopped around in a tight range, forming a bull flag type pattern on the hourly chart (about 12 bars sideways). Although the market has broken out to new swing highs, our ETF scans have not produced many high quality breakout candidates. First Trust Dow Jones Internet Index ($FDN) is a potential breakout candidate we have been monitoring for several weeks now. The monthly chart below shows the heavy volume breakout to new highs.

One ETF on our radar screen for potential pullback buy entry is iShares Nasdaq Biotech Index ($IBB). We mentioned this ETF two days ago as being in one of the only industry sectors with relative strength to the broad market (healthcare). With support of the healthcare sector confirming the move higher, we are now looking for a low-risk buy entry into $IBB on a pullback. First, let’s take a look at the longer-term weekly chart, which shows that $IBB just broke out above a valid base of consolidation last week:

After a chop fest of price action in the morning and early afternoon, stocks managed to get going with a strong surge in the final 90 minutes of trading. The S&P 500 rallied almost 1.0% off the lows of the session and closed at the highs of the day, up 0.5%. The same story played out on the Nasdaq Composite, as it also closed at the highs of the day with a 0.4% gain.

We spent several hours extensively scanning the markets over the weekend, and came to the conclusion that the current market environment is a choppy, sloppy mess. Although large-cap stocks continue to show relative strength, which enabled the Dow Jones Industrial Average to finish at a new 52-week high (on the weekly chart), the important Nasdaq Composite remains well below its prior highs. Clearly, the market has become fractured over the past two weeks. Like the Dow, the benchmark S&P 500 Index finished the week near its 52-week high. Nevertheless, it is becoming quite apparent that a tug-of-war between the Bulls and bears are starting to take place. To illustrate that, just take a look at the following daily chart of the S&P 500 SPDR ($SPY), a popular ETFs proxy for the S&P 500 Index:

Since 2006, we have been running our market timing model internally and it has always done a pretty good job of keeping us in line the intermediate-term trend, which is where we operate with our short to intermediate-term swing trading system. As mentioned above, our timing model flashed a sell signal on February 26. The market does not always have to break down immediately for the timing model to have value. As we have seen in the past, sometimes a signal is generated and the market rolls over immediately, while other signals have led to a short-term bounce in the market before breaking down. We can never know in advance what will happen after a sell signal, but we always respect the signal by going to cash and/or tightening up stops and waiting for conditions to improve before establishing new long positions.