Commentary:

Like the previous day, there was major divergence between the S&P 500 and the Nasdaq Composite yesterday, except the roles were reversed this time. The large cap blue chips rallied sharply yesterday, while the tech stocks lagged behind. The Semiconductor Index ($SOX) lost 2.6% and weighed heavily on the Nasdaq Composite, which closed with a loss of 0.3%. However, broad-based strength in Banking ($BKX), Retail ($RLX), Pharmaceuticals ($DRG), and Utilities ($DJU) propelled both the S&P 500 and Dow Jones Industrial Average to new 52-week closing highs. A positive housing report in the pre-market caused the Home Builder sector ($DJUSHB) to rocket 5% higher as well. The Dow Jones closed at 10,623, netting a 0.9% gain, while the S&P 500 Index closed at 1,147, which was 0.8% higher. Volume registered 6% lower in the Nasdaq, but was 3.7% higher in the NYSE. Since the Nasdaq closed with losses while the S&P and Dow closed with gains, this was a bullish correlation to price and volume.

The intraday price action of the major indices during the past several days has been quite indecisive. Although the S&P and Dow both rallied steadily yesterday, the Nasdaq was all over the map and undoubtedly did a good job of chopping up both the bulls and bears. After beginning the day with a sharp opening gap down below intraday moving average support, the Nasdaq resumed its selling and trended lower for the first hour of trading. By 10:30 am EST, the index had broken below the previous day’s low, the SOX index was weak, and declining volume was outpacing advancing volume by nearly 4 to 1 during the morning session. Based on these three factors, odds were good that the downtrend in the Nasdaq would continue throughout the remainder of the day. But, strength in the Dow and S&P eventually pulled the Nasdaq higher. The Nasdaq rallied from below the previous day’s low all the way back up to resistance of the previous day’s high, which caused the index to once again reverse and sell off to the middle of its intraday range during the final 90 minutes of trading. It was enough to give you whiplash, especially if you are a trend trader. The end result of yesterday’s action in the Nasdaq was a “doji star” candlestick formation on the daily chart, which indicates indecision.

Speaking of mixed signals, take a look at the daily chart of the Dow Jones Industrial Average below:

As you may recall, the Dow formed a “bearish engulfing” candlestick pattern on Tuesday when it opened above the previous day’s high, but sold off and closed below the previous day’s low. But, the Dow actually formed a “bullish engulfing” candlestick the very next day (yesterday), when it opened below the previous day’s low, then rallied to close above the previous day’s high. So, when you have a bearish and bullish engulfing candlestick on two consecutive days, it obviously indicates a lot of indecision. This should be a warning sign to both the bulls AND bears because this type of indecision usually precedes a big move in one direction or the other. Based on resistance of the primary monthly downtrend line, we still feel the next major move in the Dow will be lower. However, we don’t feel as confident about this as we did a week ago because the S&P 500 Index has now broken through its 200-week moving average without even correcting. Below is a weekly chart of the S&P 500 Index that illustrates the break of the 200-week MA. Notice also how the S&P 500 has closed higher for nine consecutive weeks:

There is certainly no denying the incredible resilience of the major indices over the past several months. Whether or not you feel the market is “overbought” at this point is completely irrelevant, as confirmed by the market’s unwillingness to correct for more than an hour or two. What is keeping the broad market at such lofty levels? I honestly don’t know and, frankly, it really doesn’t matter. We do not feel comfortable blindly buying the broad market at current levels (unless you’re only daytrading), but shorting has not been working either. Based on the numerous mixed signals we are starting to see in the major indices, we feel a major move is bound to happen soon, perhaps after all the earnings are released. I would rather not attempt to predict which way the move will be, but it would be wise to be prepared either way, regardless of your current bias. Keep a list of indexes and sectors that look like good buy setups if the market breaks higher out of the consolidation and do the same for potential short setups if the next move is down. Then, consider remaining mostly on the sidelines until all the indices begin trading in sync with each other again. It’s really not your bias (long or short) that matters at this point. What matters much more is that you are disciplined and stick to your plan of taking profits and, more importantly, cutting your losses when the stops are reached. As long as you do those things, you can be wrong many times, but make up for a low accuracy rate with a few big winners with which you let the profits ride.

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Today’s watch list:

There are no new plays for today, since we currently have three open positions (listed below)

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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.

Closed Positions:

IWM short (from Jan. 21) –
shorted 118.35, covered 119.37, points = (1.02), net P/L = ($104)

Open Positions:

IWM short (from Jan. 21) –
shorted 118.73, stop 119.55, target 114.10, unrealized points = (0.02), unrealized P/L = ($2)

HHH short (from Jan. 16) –
shorted 52.75, stop 53.70, target 50.60, unrealized points = (0.13), unrealized P/L = ($26)

DIA short (full position, from Jan. 6 and Jan. 9) –
shorted 105.27 (avg.), stop 107.55, target 100.50, unrealized points = (1.03), unrealized P/L = ($206)

Notes:

We shorted IWM yesterday, per intraday e-mail alert, but were stopped out by only 2 cents. We re-entered the trade before the close because we still like the setup, based on a doji star with a close below the previous day. We also remain short HHH and DIA, as per above.

Edited by
Deron Wagner,
MTG
Founder and President