As we often see during option expiration Fridays, both the S&P and Nasdaq futures spent most of the day in a narrow and choppy range until buyers stepped in during the final hour and pushed the major indices to close at new 52-week highs ahead of the holiday-lengthened weekend. Volume increased by 21% in the Nasdaq, which was bullish and means that Friday was technically an “accumulation day” that was marked by institutional buying. The Nasdaq Composite, which had been showing relative weakness earlier in the week, was clearly the leader on Friday. The Networking Index ($NWX) showed a huge gain of 8.5% and broke out to new highs on Friday. The Biotech Index ($BTK) also broke out to a new 52-week high and closed with a 3.4% gain. Both of these sectors were formerly lagging behind the major indices in recent months, so this indicates some new sector rotation. Keep an eye on both of these sectors to see if they follow through on their gains over the next several days. The Internet Index ($GIN), which has been very strong lately, began to show the first signs of relative weakness on Friday, so watch that sector for a possible correction to the downside as well. BDH is the ETF for Broadband (networking), BBH is the Biotech ETF, and HHH tracks the Internets.
We feel the upcoming week will be critical in determining whether the indices “make it or break it” with regard to the next major move. The reason we say this is because the Nasdaq Composite, S&P 500 Index, and Dow Jones Industrial Average each closed at new highs, but are at major long-term resistance levels, most of we discussed last week. Specifically, the S&P 500 Index continues to test resistance of its 200-week moving average, while the Dow Jones Industrial Average is still testing resistance of its primary monthly downtrend from the January 2000 high. Furthermore, the Nasdaq Composite has now rallied into its 200-week moving average as well, which means that all three of the major indices are either at resistance of a 200-week moving average or primary monthly downtrend line. The weekly chart of the Nasdaq Composite below illustrates the new resistance of the 200-week moving average:
In addition to the Nasdaq Composite and S&P 500 both testing their 200-week moving averages, the Dow Jones continues to test resistance of its primary monthly downtrend line from the January 2000 high. This is the reason we are still short DIA (Dow Jones Industrial Average):
In addition to the Nasdaq Composite closing at its 200-week MA, the Semiconductor Index ($SOX) has done the same. So, this means that the Nasdaq Composite, S&P 500, and SOX are each at resistance of their 200-week moving averages, while the Dow is at resistance of its monthly downtrend line. Perhaps you now understand why we said this week’s performance will be one that will cause the indices to either “make it or break it.”
If the Nasdaq, S&P, Dow, and SOX each have enough strength to each close firmly above the aforementioned resistance levels at the end of the upcoming week, it will be very bullish. However, both the 200-week moving average and monthly downtrend lines are typically major resistance levels that are not easily overcome without first seeing a correction in the corresponding index. We have now gone for nearly a month without a correction of more than 1%, so draw your own conclusions there. For this reason, we do not feel comfortable with aggressively entering new long positions until the major indices either form some type of correction or close firmly above the resistance levels we spoke of. Based on the 200-week moving averages, we feel it may be a good risk/reward to begin entering new short positions here. However, only do so if your time horizon is at least a few weeks because the indices could easily chop around or even go a bit higher before the moving averages do their thing. If you are not comfortable with being short for more than a few days, then you probably should wait until the market provides some type of confirmation it is nearing a short-term top before selling short. One such example would occur if the major indices open at a new high, but close below the previous day’s low AND on high volume, which would represent institutional selling. But, as of this moment, the trend remains bullish and anything can happen. Therefore, remember to always use and obey your stops regardless of how confident you are of a particular trade setup. Anything can and will happen in the markets, whether you think it makes sense or not!
Today’s watch list:
EWH – iShares Hong Kong Fund
Trigger = above 11.05
(breakout to new 52-week high)
Target = 12.45 (resistance of the Jan. 2001 high)
Stop = 10.50 (below the breakout level)
Notes = We have been stalking EWH for an entry point because we remain bullish on Asia and specifically China, which we feel is just beginning to enter a new bull market. We also feel the risk/reward of being long Asia-related ETFs is better than the domestic markets at current levels. EWJ (Japan fund) is another ETF you may wish to take a look at. EWH is not yet listed on the MTG Position Sizing Model, but the multiplier ratio is four, which is the same as EWJ. Expected time frame on this trade, if it triggers, is several weeks to a few months.
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.
DIA short (full position, from Jan. 6 and Jan. 9) –
shorted 105.27 (avg.), stop 107.55, target 100.50, unrealized points = (0.85), unrealized P/L = ($170)
We did not enter any new positions on Friday, but we remain short DIA.
Founder and President