Despite an opening gap down and initial selloff that caused the major indices to test support of the previous day’s lows, the market remained resilient yesterday due to the bulls’ buying on weakness. Yesterday’s broad-market rally caused last week’s highs in most of the major indices to broken, as well as the key pivot points we have been discussing during the past week. All of yesterday’s gains came from the first half of the day, after which the major indices traded in a sideways range during the entire afternoon session before closing in the upper third of their intraday ranges. Let’s take a look at yesterday’s relative performance in each of the major indices.
Starting with the leader of the broad-based indices, the COMPX (Nasdaq Composite) closed about 20 points above its prior resistance of 1521, which was the high of December 2. Yesterday’s closing price of 1541 on the Nasdaq Composite was the highest we have seen since June of 2002, which means that the Nasdaq Composite nearly set a new 52-week high yesterday. Without a doubt, yesterday’s close above the prior high of December 2 has raised a lot of interest by traders who fully expected the Nasdaq to fail the breakout at 1521. Since basic technical analysis dictates that prior resistance becomes the new support level, continue to keep a close eye on the 1521 level for the remainder of the week. If the Nasdaq Composite sees a sharp price correction in which it drops back below the 1521 level, it means we are potentially looking at a double top off the December 2 highs. However, if the Nasdaq tests that level and firmly bounces off of it, it will indicate the type of price action that provides us with the confirmation that the uptrend is likely to continue for at least a little while longer.
It’s interesting to note that we saw significant divergence yesterday between the COMPX (Nasdaq Composite) and QQQ (Nasdaq-100 Index), which is more narrowly focused than the COMPX. The divergence is simply that, unlike the COMPX, the Nasdaq-100 (QQQ) was NOT able to close above the highs of last week. Instead, it found price resistance almost exactly at last week’s highs. What does this tell us? Well, consider that the Nasdaq-100 Index consists primarily of larger, well-established companies (mid and large caps), while the Nasdaq Composite consists of a more diverse group of companies, including many small cap companies. Therefore, if the Nasdaq Composite is showing relative strength to the Nasdaq-100, this tells us that much of the current strength in the Nasdaq Composite is coming from the small caps, rather than the established large caps such as Microsoft and Intel. As confirmation of this analysis, take a look at IWM, the ETF for the Russell 2000 Small-Cap Index, compared with QQQ, the ETF for the Nasdaq-100 Index. Notice how IWM broke above both the highs of December 2 AND the previous week, but QQQ barely closed above the December 2 high and did NOT have enough strength to close above the highs of last week:
SPY (S&P 500 Index) finally closed above its January 13 high of 93.86, as well as last week’s high of 94.38. This means that SPY and the S&P both closed at new highs of the calendar year. However, the next major test of resistance, which is the December 2 high of 96.05, looms just overhead. If, and that’s a big “if,” SPY closes over its December 2 high of 96.05, it will correlate to a close above 950 in the S&P futures. Although we cannot confirm it, there is talk on the street that a large number of institutional buy stop orders are sitting just over the 950 level because many hedge funds are still short. While this means we could see a powerful rally if the 950 level is broken, it also means that the big players who are short will do everything in their power to prevent the S&P from trading above 950. So, it will be interesting to see how this plays out over the next several days.
DIA (Dow Jones Industrials Index) closed higher (on a percentage basis) than both SPY and QQQ yesterday. Although it has lagged sharply behind both the S&P and Nasdaq in recent months, relative strength could clearly be seen in the Dow yesterday. In fact, we were growing so accustomed to the Dow lagging the broad market that it was a bit unusual to see the Dow as the leading index. DIA closed nearly a point above last week’s high of 86.58 and its next major resistance is not until 88.88, which is the high of January 13. The breakout in the Dow yesterday clearly points to a decent probability of the Dow completing the predicted move of the break above the ascending triangle pattern on the weekly chart.
Despite all the bullish breakouts in the major indices yesterday, I could not help but get a sense that, for some reason, yesterday’s rally lacked conviction. I could not place my finger on the cause of this feeling during the trading day, but I figured out the root of my suspicions while doing research last evening. The answer was total market volume, or rather the lack of it. Although yesterday’s volume in both the NYSE and Nasdaq was higher than it was during either of the two previous days, it was sharply lower than the volume spikes we have seen during the last two “swing highs” in the uptrend. In other words, prices set new highs in the major indices, but the market’s volume did not correspondingly increase with the breakouts. Given the fact that the Nasdaq broke its December 2 highs and the S&P broke its January 13 highs, the market volume should have been higher than it was during the previous high set on May 6. Instead, volume was significantly lower which suggests to me that the buyers are beginning to dry up. This, in turn, means that odds are good that yesterday’s breakout in the major indices will fail unless volume suddenly spikes with a corresponding increase in prices during the next one to two days.
Because of our lack of conviction in yesterday’s rally, we made the decision to be mostly in cash overnight rather than trying to play the breakout in the major indices. We could easily be wrong about our suspicion, but the risk/reward of being long the broad-based ETFs overnight did not seem to be a positive one. This is further compounded by the fact that the major indices are once again close to pushing up against the upper channels of their uptrend lines on the daily charts. While we are not feeling very bullish on the market, shorting could be equally as tricky right now because there is a good deal of price support below current prices and there are not many clear short setups out there. Therefore, we are using caution on both sides of the market right now and will probably remain mostly in cash until the market settles and shows its hand for the next move.
Today’s watch list:
QQQ (Nasdaq 100 Index Tracking Stock)
Trigger = below 28.60 (below support of the hourly trendline)
Target = 27.80 (just above the prior low and 20-day MA)
Stop = 29.00 (above yesterday’s high)
Notes = If yesterday’s breakout fails, QQQ will probably be among the weakest of the major indices because it has been the strongest on the way up. Furthermore, we are seeing sector rotation out of the Nasdaq and into the Dow, increasing the risk/reward for shorting QQQ. In the event of an opening gap down, remember to use the MTG Opening Gap Rules, which states we either wait for a break of the 20-minute lows OR a rally into resistance after the opening gap down.
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
BBH long (1/2 position from May 8) –
bought 100.25, sold 103.25, points = + 3.00, net P/L = + $147
OIH long (1/2 position from May 8) –
bought 58.20, sold 59.90, points = + 1.70, net P/L = + $83
XLP long (1/2 position from May 8) –
bought 19.29, sold 19.55, points = + 0.26, net P/L = + $47
XLP long (1/2 position from May 8) –
bought 19.29, stop raised to 19.45, target
of 20.00, unrealized points = + 0.31, unrealized P/L = + $57
We took profits on BBH and the remainder of OIH yesterday through the use of trailing stops. We also locked in some gains on half of XLP. The only position we took overnight was 1/2 position of XLP, which we have raised the stop on. Small profits were realized on intraday trades on SPY and DIA in the ETF Real-Time Room, which will be reported in the next weekly newsletter.
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