The major indices concluded last week on a positive note as options expiration came one day early due to the markets being closed for holiday on Friday. Despite the fact that many traders were absent from Thursday’s pre-holiday session, total market volume was relatively strong. In fact, the total market volume for the Nasdaq on Thursday was the highest single day we had seen for more than two weeks prior. While much of this volume could be attributed to options expiration, the decent volume enabled the major indices to settle into a smooth and steady intraday uptrend that caused QQQ (Nasdaq 100) to close on its high of the week. SPY (S&P 500) and DIA (Dow Jones Industrials) both lagged the Nasdaq last week, although the relative weakness was most prevalent in the Dow.
From a technical view, the major indices are at a very critical juncture as we enter the new week. The narrow range compression on the daily charts, combined with the convergence of multiple daily moving averages, and proximity of weekly trendline resistance levels each add up to be the ingredients for a big move in one direction or the other. While there is not yet enough confirmation to say which way the market will go when it breaks out of its current range, there are numerous technical indicators that point to the likelihood of an upside breakout. However, we are entering the week cautiously because the market could just as easily sell off rapidly and sharply if unable to break through several key resistance areas that are closing in. So, let’s take a look at each of the major indices, as represented by the broad-based ETFs, to provide you with the key levels to watch going into this week. We’ll begin by looking at a daily chart of QQQ:
QQQ continues to show the most relative strength of the three major indices and is the only one that is within pennies of setting a new high of 2003. QQQ is also the only major indicie that is trading above all its major daily moving averages (20, 50, 100, and 200). Several other indicators we use on daily charts, ADX and CCI, are both confirming the start of an uptrend as well.
As you can see from the chart above, QQQ closed just below its daily trendline resistance last week, meaning it will soon be “make or break” time for the Nasdaq. If QQQ breaks above Thursday’s high of 26.98, expect to see minor price resistance at the following levels: 27.20 (April 7 high), 27.38 (March 21 high), and 27.47 (January 13 high). If QQQ gets beyond these levels, it will represent a new high of 2003 and will likely test its prior swing high of 28.79, which was set on December 2, 2002. However, if QQQ is unable to break above Thursday’s high and hence the daily trendline resistance within the next few days, then it is likely QQQ will sell off down to its 2003 lows. Next we’ll take a look at a daily chart of SPY:
Although the S&P has been lagging the Nasdaq this year, SPY held its own last week and managed to close above its all-powerful 200-day moving average in 3 out of the last 4 days. SPY closed just below its 200-day MA on April 16, but bounced right off it the next day and closed near its intraday high. Last week marked the first time since March 2002 (more than one year ago) that SPY closed above its 200-day moving average. Since the 200-day moving average usually acts as very powerful price support or resistance, this could indicate a “changing of the guard” and gradual shift to a daily uptrend if SPY continues to hold above its 200-day MA this week. Also notice the convergence of the 20, 100, and 200-day moving averages just below last week’s close. This convergence has the potential to act as a spring to shoot SPY higher from here IF it holds above the convergence level.
SPY has price resistance from the high of April 16 at 90.07, about 50 cents above Thursday’s close. Beyond that, watch for resistance at 90.85, which is the high of April 7. If SPY breaks above 90.85 in the coming week, it will also face resistance of its 50-week moving average at the 91.13 area. If there is still enough momentum left, the next stop would be its January highs, just below the 94 area. However, before you get too excited about being long, remember that we still don’t have much confirmation yet and SPY could easily break the lower channel support of the uptrend line from the March 12 low. If this happened, it is likely that SPY would fall back down to its lows of the year. In fact, SPY is probably a pretty good short setup IF it trades below the April 17 low of 88.19, which would put it back below both its daily uptrend line AND its 200-day MA. Finally, let’s take a look at DIA:
If it wasn’t for the Dow’s relative weakness in recent days, I would be more bullish about the intermediate-term outlook of the broad market. Notice how, compared to SPY and QQQ, DIA was barely able to bounce on the final day of trading last week. In fact, DIA barely closed above its 200-day moving average (by only 3 cents). Looking at the chart above, you will also see significantly more overhead price resistance from prior highs over the past month. Therefore, while QQQ and SPY look as if they want to head higher from here, DIA is lagging and the broad market rarely sustains a rally for long without the Dow in sync. Therefore, keep a close eye on the relative performance of the Dow compared with the S&P and Nasdaq this week because the Dow needs to “catch up” in order to confirm a broad-market move higher from here. We believe the Dow will start to trade more in sync with the rest of the broad market (which does NOT necessarily mean higher) upon conclusion of the blue-chip earnings season.
Over the next few days, we’ll take a look at weekly charts of the broad-based indices, which will give us a clearer picture of the intermediate term outlook. However, the purpose of the daily charts above is to prepare you to watch the key support/resistance levels that are likely to be factors going into the new week. Though the overall market bias has been slightly positive lately, caution is in order on the long side of the market until we receive more technical confirmation that we are headed higher. Remember that the market is at a very critical juncture right now and a rapid, violent move to EITHER side of the market could easily occur based on the recent price compression and moving average convergence, both at daily and weekly trendline resistance. Therefore, be sure to use stops (as always) and remember to TRADE WHAT YOU SEE, NOT WHAT YOU THINK.
Today’s watch list:
SMH – Semiconductor HOLDR
Trigger = above 26.60 (above horizontal price resistance on daily chart)
Target = $29.90 (just below swing high from December)
Stop = $25.60 (0.618 Fibo retracement of two-day rally)
Notes = The Semiconductor Index is poised to break a quadruple top on the daily chart and momentum will push it along it if does so. Remember to use the MTG Opening Gap Rules to wait for a break of the 20-minute highs before going long if SMH gaps up above our trigger price.
Daily Reality Report:
Below is Morpheus Trading Group’s daily performance report of closed trades and an update on all open positions from The Wagner Daily (ETF Intraday Real-Time Room trades are reported separately in The Wagner Weekly). Net P/L figures are based on the quantity of shares represented in the MTG Position Sizing Model.
SPY long (1/2 position from April 17) –
bought 89.58, stop at 88.35, target 93.80, unrealized points = (0.02), unrealized P/L = ($4)
QQQ long (1/2 position from April 17) –
bought 26.90, stop at 26.25, target 28.70, unrealized points = (0.08), unrealized P/L = ($18)
IEF short (1/2 position from April 9) –
shorted 85.87, new stop at 86.25, target of 84.00, unrealized points = + 0.22, unrealized P/L = + $20
The DIA short from last Thursday did not trigger due to strength in the broad market. However, continue watching DIA closely for signs of weakness. We bought 1/2 positions of both SPY and QQQ to take as swing trades per an intraday e-mail update on Thursday. We will update you via e-mail of any changes.
We sold the rest of the EWZ position at 9.50 on Thursday for a 7% gain from the April 11 entry at 8.85, which was called in the ETF Real-Time Room. We may add to the IEF short today if it shows relative weakness. We are still long BBH from 93.09 with a 3-point unrealized gain.
Click here for a detailed explanation of how daily trade performance is calculated.
Click here for a detailed cumulative report of MTG’s trading performance (updated weekly)
Glossary and Notes:
Remember that opening gaps that cause stocks
to trigger immediately on the open carry a higher degree of risk because the
gaps (both up and down) often do not hold. Use caution if trading stocks with
large opening gaps.
Trigger = Exact price that stock must trade
through before I will enter the trade. If a long position, I will only enter the
stock if it trades at the trigger price or higher. For a short position, I will
only enter the stock if it trades at the trigger price or lower. It is really
important to only enter the position if the trigger price is hit, otherwise the
trade becomes riskier.
Target = The anticipated price I am
expecting the stock to go to. However, this does not mean that I will
always hold the stock to that price. If conditions warrant, I will sometimes
take profits before that price, in which case I will notify you of the
Stop = The price at which I will have a physical stop
market order set. As a position becomes profitable, this stop price will often
be adjusted to lock in profits. Again, you will always be notified of such
changes in the next daily report or intraday if you subscribe to intraday
SOH = Sit On Hands (Don’t Make Trades)
under Deron’s Report Card is based on the actual price I closed my trade at, not
just the theoretical target or stop price listed for each stock. Open P&L is
based on the closing prices of the most recent trading day.
otherwise noted, average holding time is 1 to 3 days once a position is
triggered. Updates on open positions are provided daily.
Yours in success,
Deron M. Wagner