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Potential ETF Buy Setups For The Coming Week (TAN, ECH, BRF, INP, and more)

 July 26, 2010 09:16 AM

Stocks followed up the previous day's breakout with another round of gains last Friday, as near-term market sentiment continued improving. The major indices chopped around in a sideways range throughout the first half of the day, but rose to new intraday highs in the early afternoon. The Nasdaq Composite and Dow Jones Industrial Average scored identical gains of 1.0%. The S&P 500 advanced 0.8%. Confirming investors' greater appetite for market risk, small and mid-cap stocks again showed substantial relative strength. The Russell 2000 and S&P Midcap 400 indices climbed 2.4% and 1.5% respectively. Closing just above their previous day's highs, all the main stock market indexes settled near their best levels of the day and week.

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Turnover was mixed. Total volume in the Nasdaq increased 10% above the previous day's level, enabling the Nasdaq Composite to register another bullish "accumulation day." However, trading in the NYSE eased 2%. Volume in the Nasdaq swelled to its highest level since July 1, and also moved back above its 50-day average level for the first time since the same day. Market internals in both exchanges were solid. In the NYSE, advancing volume exceeded declining volume by nearly 4 to 1. The Nasdaq adv/dec volume ratio was positive by more than 2 to 1.

As the market has been starting to show more positive price action, our near-term bias has shifted from neutral to cautiously bullish. Due to major overhead resistance of the June highs, as well as the 200-day moving averages for several of the major indices, it's still too early to aggressively start "backing up the truck." Since a high degree of caution is still required in the current environment, it's important to focus on ETFs and stocks with the highest odds of outperforming the broad market to the upside, which also have lower odds of falling apart on the first broad market pullback. Simply, we especially want to focus on tickers that have been showing the most relative strength to the main stock market indexes.

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Recently, we said the easiest way to spot current relative strength is to locate ETFs that are already trading at or above their prior highs from June. Since all the major indices are still well below their respective June highs, this is a quick, effective benchmark measurement of near-term relative strength. Furthermore, it's even better leadership if an ETF is not only above its June high, but is also trading at or near its 52-week high as well. In that regard, only a handful of ETFs qualify.

Several domestic, industry sector ETFs have already moved above their June highs, but are still substantially below their 52-week highs. This list includes sectors such as: steel (SLX), computer networking (IGN), basic materials (XLB), agricultural commodities (DBA), and solar energy (TAN). But there is still a big difference in relative strength amongst these ETFs.

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