Yesterday was a great example of the power of the 50-day moving averages and clearly illustrated why we have recently been spending so much time discussing the 50-day moving averages. Following on the heels of last Friday’s bearish reversal day, the major indices gapped down below their 20-day moving averages yesterday morning and spent the morning in a steady downtrend. The Nasdaq, which was showing relative weakness to the other indices, sold off well below its 50-day MA, but both the
S&P 500 and the Dow Jones Industrials found support exactly at their 50-day moving averages, which enabled a small rally and break of the intraday downtrend during the final hour of trading. Below are daily charts of both SPY (S&P 500 Index) and DIA (Dow Jones Industrial Avg.) that illustrate their respective bounces off their 50-day moving averages:
Despite yesterday’s opening gap down and morning downtrend, you can see that the 50-day moving averages perfectly marked yesterday’s lows in both the S&P and Dow. Even the Nasdaq Composite, which traded below its 50-day MA on an intraday basis, recovered during the final hour and closed just above it. This is because, as we commonly mention, the 50-day moving average represents a level that nearly every professional trader and institution closely follows and is also a level that frequently triggers buy or sell programs. Therefore, because so many traders buy in anticipation of the 50-day MA providing support, it becomes a self-fulfilling prophecy. And that is how support and resistance levels become what they are — mass crowd psychology.
One thing we found interesting is that, despite the break of the 20-day moving averages and test of the 50-day MAs, total market volume was only 2% higher than last Friday. This could be interpreted as somewhat bullish because, despite the break of a key support level yesterday, the selling volume did not spike higher. Furthermore, the lack of high volume yesterday is one reason to use a bit of caution on the short side going into today.
Once the major indices broke below their 20-day moving averages, it was pretty easy to anticipate that they would at least sell off and test their 50-day moving averages because there was not much price support between those two levels. This is the reason why we remained short QQQ over the weekend and initiated a new short position in SPY yesterday. However, our expectations going into today are not as clear.
As you can see from the daily charts above, the major indices are now trapped between support of their 50-day moving averages below and resistance of their 20-day moving averages overhead. Of the two, the 50-day MA is generally more powerful than the 20-day MA. But, in addition to the 20-day MA, there is also a shelf of horizontal price resistance that was formed when the broad market broke below last week’s lows. This means that any rally attempt above yesterday’s highs is likely to be met by selling from those people who are trapped on the long side of the market at higher prices. Therefore, it would require an increase in volume in order to blast much higher than yesterday’s highs. Conversely, the 50-day MA proved its power yesterday, so don’t expect the indices to easily drop below this level, although a re-test of at least yesterday’s lows could easily happen due to the amount of overhead resistance that has been created.
The best way to play today is to remain nimble and let the market show its hand before aggressively trading on either side of the market. Since we have had a higher number of trending days than usual over the past week, it would not surprise me if today simply chops around and trades sideways within yesterday’s range. If it does, cash is probably your best bet, at least for today.
Today’s watch list:
Since we expect a range-bound and choppy day, there are no new plays for today. However, we may initiate new short positions if yesterday’s lows (and hence the 50-day MAs) are broken. As for long positions, there is too much resistance above yesterday’s highs to provide us with a clear swing trade on the long side. New long positions are better left for intraday trading right now, which is what we do with both stocks and ETFs in the Intraday Real-Time Room.
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 (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.
- QQQ short (from Nov. 14) –
shorted 35.48, covered 34.74 (avg.), points = + 0.74, net P/L = + $284
SPY short (HALF position, from Nov. 17) –
shorted 104.70, covered 104.65, points = + 0.05, net P/L = + $3
- EWJ long (1/4 position, from Nov. 17) –
bought 8.71, stop at 7.90, unrealized points = (0.02), unrealized P/L = ($4)
We scaled out of the QQQ swing short position through the use of trailing stops and netted a solid gain. We also shorted SPY yesterday afternoon as a swing trade, but the afternoon bounce stopped us out near breakeven on the same day we entered the trade. We also bought a quarter position of EWJ as a LONG-TERM position (several months) and will be adding to the position when we see a low-risk opportunity to do so. For now, having only 1/4 position size of EWJ minimizes the risk, but still enables us to participate in any upside movement from here in EWJ.
Edited by Deron Wagner,
MTG Founder and President