Welcome back from the extended holiday weekend. I hope you had a relaxing and enjoyable break. Last Friday’s miniscule volume concluded the lethargic month of August and the good news is that this week typically marks the beginning of the seasonal return of the “big money” institutional players. This should result in the broad market’s volume gradually increasing back to more “normal” levels, as defined by the 50-day averages. Most likely, volume will increase a bit today and will gradually pick up as the week progresses. The big question on everyone’s mind, of course, is which way will the institutions take the market after they step back in. So, today I will attempt to answer this question by taking an objective look at the technical state of each of the S&P 500 Index, the Nasdaq, and the Dow Jones Average.
The dominant pattern we saw in last week’s trading sessions was a tight and narrow range throughout most of the day, followed by a rally during the final hour. We therefore know that the recent bias has been to the bullish side. However, we also know that rallies cannot be trusted when volume is light because a few big sellers can easily reverse any intraday uptrend. If you look at the recent price action of August 22, in which a week’s worth of gains was wiped out in one day, you will see a clear example of how easily trends can reverse on light volume. Therefore, while the broad market has been acting relatively bullish, caution on the long side is certainly in order until we see how the market reacts on the first day of a sharp volume increase. Since the S&P 500, Nasdaq, and Dow have been diverging from one another, we need to analyze daily charts of these indices individually. Let’s start with a daily chart of the S&P futures:
The psychological support level of 1000 that we discussed last week was a key factor on Friday. Interestingly, the opening price was exactly 1000 and the low of the day was 999; it remains clear that 1000 is continuing to act as a key support level to watch. In addition, notice that the S&P is now firmly back above both its 20 and 50-day moving averages, which have converged exactly at 989 (99.40 on SPY). As long as the S&P stays over 1000, the risk/reward probably favors the long side. Below 1000, the S&P will probably quickly drop down to the 989 – 990 area.
Aside from the price levels mentioned above, there are two additional points that are perhaps more important. First is that the S&P has been making a pattern of lower highs. Since the high of June 17, the S&P has formed three slightly lower highs on each attempt to break out to new highs. Therefore, we must assume this pattern of lower highs will continue UNTIL the S&P proves otherwise. Since the index is now approaching its prior high, this is the point at which it would start to head back down again, setting a fourth lower high, if the trend continues. Obviously, if the index breaks out to new highs, it is a good risk/reward to go long because of the multi-month consolidation base that has formed.
The second point to be aware of with regard to the S&P is that Friday marked the fifth consecutive day of higher closing prices. Since the index basically remains in a trading range and is not really trending in either direction, I would be surprised if the S&P makes another leg up without first trading sideways to down for a few days. When in an uptrend, indexes tend to rally for three days then retrace for one day. However, if the retracement does not come after three days, odds are even greater that a correction will come after the fifth day, even if just a minor one. Overall, I would be quite cautious being long SPY or the S&P futures UNLESS the prior high of 1012.20 is broken on the S&P futures, which correlates to (101.82) for SPY. Next we will take a look at a daily chart of the Nasdaq futures:
If you were not on holiday and were actively trading the markets last week, I am sure you know that the Nasdaq has been showing relative strength to both the S&P 500 and the Dow. The index performed well last week largely due to strength in the Semiconductor (SOX) Index, which is sitting at its 52-week high. As you can see, the Nasdaq futures (and QQQ) correspondingly closed at a new 52-week high last Friday. However, it is important to note that the Nasdaq futures failed to close above the prior intraday high of 1343 that was set on August 22. While the index closed at a new 52-week high, it actually closed one point below the prior intraday high. This means that we do not yet have a confirmed breakout to new highs, especially given last week’s light volume. Therefore, be aware of a potential double top at the 1343 area of the Nasdaq futures, which corresponds to 33.37 for QQQ. Furthermore, the Nasdaq, like the S&P, has had five consecutive days of higher closing prices. This increases the odds of a correction, especially when combined with the prior resistance of the August 22 high. Finally, here is a daily chart of the Dow Jones Industrial Average:
The main thing to point out with the Dow is that it was the laggard last week, showing relative weakness to both the S&P and the Nasdaq. However, keep in mind that the Dow was showing relative strength just two weeks ago when it broke out to a new 52-week high. Therefore, we are probably just seeing some expected sector rotation and I would not read too much into the Dow’s performance last week. Based on the daily chart, the Dow actually has less overhead resistance than the S&P because it does not have to contend with resistance of several prior highs from the past several months. 9400 acted as resistance in the Dow last week, but it managed to close above that level last week. The next key resistance is at the psychological resistance of 9500, which also corresponds to the prior high of August 22. If the Dow can blast through 9500, buying DIA for a burst of momentum is not a bad idea (as long as volume confirms the move). As you can see from the horizontal line, there is support just below 9300, which equates to the prior resistance from the highs of July, as well as the 20-day moving average. By the way, have you taken a look at a MONTHLY chart of the Dow, going back about 20 years? If so, you may have noticed that the lower channel trendline support of the 20-year uptrend is all the way down around 6500, but that’s a whole different story!
In addition to the three major indices, I thought it was interesting that both MDY (Mid-Caps) and IWM (Small Caps) actually showed relative weakness when the broad market rallied on Friday. If you look at charts of both of these, you will see that they were selling off during the final hour, while the S&P, Dow, and Nasdaq were rallying. Without confirmation of further weakness today, I would not trust a short-lived selloff. However, I would definitely keep an eye on both MDY and IWM as potential short setups on any broad market weakness today.
Several sectors and their corresponding ETFs have interesting looking daily charts. Oil Service (OIH) may break a double top today, after correcting on Friday, so we are watching it for a potential long entry over the 61.10 area. Also notice that the 20-day MA is about to cross back over the 50-day MA on OIH. Another sector we have been stalking for the past week, Utilities, showed strength into the close on Friday afternoon, so we expect UTH to break out today. We are still planning on buying UTH over the 70.75 area. The long period of consolidation should act as support for UTH and the volatility contraction should provide the momentum. If you don’t like trading UTH because of its spread, consider trading XLE, which has somewhat similar underlying components. The Semis (SMH), Software (SWH), and Retail (RTH) all showed relative strength last week, but Financials (XLF) showed relative weakness and are lagging the broad market. Pharmaceuticals, which we are currently long via PPH, started to act really well on Friday. The risk/reward for being long the drug stocks here is positive. Meanwhile, Biotechs (BBH) remain in a trading range, absorbing the huge gains of earlier in the year. And on the “wow” list, check out the recent price action of the Nikkei and EWJ!
Overall, the markets look poised to potentially break out and make another leg higher, especially when considering the recent strength in the Semis and the Nasdaq. The weekly charts all look great and are further providing support. But, I would not be surprised to see a few days of either correction first. Most importantly, pay close attention to how the market acts once the “big money” returns and volume increases. The volume/price relationship will tell us everything we need to know!
Today’s watch list:
UTH – Utilities HOLDR
Trigger = above 70.75 (above the daily consolidation)
Target = 72.95 (resistance of the 61.8% Fibo retracement)
Stop = 69.90 (below yesterday’s low)
Notes = As you know, we have been stalking UTH for the past week, waiting for a break of the consolidation. Friday afternoon’s action was bullish and we think there is a good chance UTH breaks out within the next day or two. Although there is a 50-day moving average just overhead, a break out of the consolidation should be strong enough to power right through it. If it does finally break out, we expect it to easily run a few points due to the base of support that has been built. Also, if you look at the WEEKLY chart of UTH, you will see that it is poised to break resistance of a multi-year downtrend, meaning we may want to be patient with this play and attempt to trail the profits longer.
Be aware that UTH often has a wide spread and you definitely want to use limit orders when trading it. More importantly, remember you can use its index to more accurately know where to place your limit order based on the fair value of its underlying components. The index for UTH is $XUH.X, which can be charted just like UTH. Because of the wide spreads, we use alarms to alert us of an entry price, rather than a mechanical buy stop order. Also keep in mind that we account for the volatility of UTH by reducing our share size, since it has a multiplier ratio of only 0.5, based on the MTG Position Sizing Model.
IWM – iShares Russell 2000 Small Cap Index
Trigger = below 98.88 (below support of hourly uptrend line)
Target = 97.50 (support of 50% Fibonacci retracement)
Stop = 99.50 (above trend line support)
Notes = Per earlier commentary, we are watching IWM for a potential short so that we are prepared if market reverses today. IWM began showing relative weakness on Friday afternoon and we should see follow-through only if broad market is weak.
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
PPH long (from Aug. 26) –
bought 73.27, new stop at 72.90, target of 75.05, unrealized points = + 0.57, unrealized P/L =
Still long PPH and we will e-mail you any changes to the stop or if we take profits.
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