One of the primary elements Morpheus Trading's methodology is a focus on sector trading. As institutional players such as mutual funds, hedge funds, and banks continually position their portfolios for maximum gain, funds are constantly being rotated out of one industry sector and into another. Our goal is to identify the rotation of these funds, and ride along on the coattails. However, for our technical swing trading strategy, the money flow must also coincide with positive chart patterns that point to a potential buy entry.
Presently, the iShares Nasdaq Biotechnology Fund (IBB) is a sector ETF that meets this criteria. To start with, we look at the "big picture" by assessing the dominant trend on the longer-term weekly chart interval, which is shown below:
As you can see, IBB has been consolidating in a sideways range for the past six weeks, while the 10-week moving average has risen to provide support. This pattern hints that a breakout and resumption of the dominant uptrend may soon occur. Let's take a closer look when looking at the daily chart interval:
On the daily chart, we see a gently downward sloping trendline from the highs of the consolidation. At the bottom of the consolidation, we see a successful test of support from the prior swing low in February. As such, IBB is now in play for a potential buy entry on a breakout above the downtrend line illustrated on the chart above. This coincides to move above the two-day high, around the $121 level.
The benefit of trading a sector ETF such as IBB is that volatility is lower than trading an individual stock within the sector, due to the automatic diversification of ETFs. However, if you're looking for a little more alpha or potential upside movement to spruce up your portfolio, you may also consider trading leading stocks within the sector. Below are annotated chart patterns of two such individual stocks setting up for potential buy entry:
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