The major indices closed with a mixed performance last Friday, as the Nasdaq Composite closed with a gain of 0.2%, while the S&P 500 Index and Dow Jones Industrial Average closed 0.2% and 0.5% respectively lower. Despite the small gain in the Nasdaq, last Friday was the first day in several weeks in which the major indices trended smoothly lower throughout the entire day. Although we have recently had a few days in which the indices closed lower, the losses have been the result of choppy and indecisive days rather than intraday downtrends. As a trend trader, I don’t really care whether the market trends up or down intraday, just as long as there is a trend. As such, Friday’s smooth trend was a nice change from the choppy and indecisive days we saw earlier in the week. Volume came in slightly lower in both the NYSE and Nasdaq, indicating a lack of heavy institutional selling. However, the volume breadth was negative because declining volume slightly outpaced advancing volume in both the NYSE and Nasdaq.
If you were watching the price action of the S&P and Nasdaq futures into Friday’s closing bell, you probably noticed an odd rally that began only 15 minutes before the close of trading. This was likely due to the fact that the “big money” was “painting the tape” in an attempt to push the S&P 500 Index to close the week above the 1139.80 level. This number was important because a close below that level would have marked the end of the S&P’s weekly winning streak, but a close above 1139.80 would have extended the S&P’s streak to nine consecutive weeks of gains, which is what occurred. If you are a big institution that is ready to begin unloading large long positions, the best way to do so is to have the financial press talking about the S&P’s ninth consecutive week of gains in the various weekend publications. Conversely, a close below the 1139.80 level would have enabled the talking heads to say things like “S&P 500 breaks its 8-week winning streak,” which would have increased the odds of retail (“dumb money”) selling going into this week. Am I implying a conspiracy occurred on Friday afternoon? Not at all — just another day at the races for the “smart money.” Below is a 15-minute intraday chart of last Friday’s action in the S&P 500 Index. Notice the closing rally that pushed the index into positive territory for the week:
Last week’s close of 1141.50 on the S&P 500 Index did indeed extend the S&P’s winning streak to nine consecutive weeks, but caused a “doji star” candlestick to be formed on the weekly chart. The “doji star” pattern in itself indicates indecision, but often precedes a reversal of trend when it occurs at the end of an extended trend. If the S&P 500 closes below last week’s low in the coming week, the “doji star” will have confirmed the beginning of a trend reversal, or at least a short-term correction in the S&P. However, the 200-week moving average is now just below at 1127, which is likely to act as support. I have circled the “doji star” candlestick on the weekly chart of the S&P 500 below:
Unlike the S&P 500 Index, both the Dow Jones Industrial Average and Nasdaq Composite broke their extended winning streaks last week. The Dow (barely) broke its eight-week winning streak by closing 0.3% lower on the week. More importantly, however, the primary monthly downtrend line, which began with the January 2000 high, is still intact. Therefore, our intermediate-term short position in DIA is still valid as well. As we mentioned a few weeks ago, there is a good chance this downtrend line will mark the intermediate-term top in the Dow. Notice how the Dow has been unable to break above resistance of its monthly downtrend line:
The Nasdaq Composite broke its four-week winning streak by closing 0.8% lower last week. Interestingly, the 200-week moving average for the Nasdaq Composite is only ten points below Friday’s closing price. The weekly chart of the Nasdaq below illustrates this:
Going into today, keep an eye on the Semiconductor Index ($SOX), which was one of the only sectors that showed a real price correction last week. After four consecutive down days while in the context of an uptrend, the SOX should bounce today. But, if it doesn’t, that may indicate that the Nasdaq is poised for a real correction. Aside from the SOX, most sectors only began to show signs of a correction on Friday, so we expect follow-through to the downside over the next several days. The sectors that have been very strong over the past month are the ones that are likely to correct the hardest, assuming they do correct. In particular, watch for a retracement in the Telecoms ($XTC), Oil Services ($OSX), Internets ($GIN), Biotech ($BTK), and Financials ($BKX). The corresponding ETFs are: TTH, OIH, HHH, BBH, and XLF. Volume patterns have NOT yet indicated a major correction is coming, so be careful about getting aggressively short right now, but Friday’s action would make me nervous about being heavily long right now as well.
Today’s watch list:
WMH – Wireless Index HOLDR
Trigger = below 54.55 (below Friday’s low)
Target = 52.40 (just above the 20-day MA)
Stop = 55.65 (above last week’s high)
Notes = The Wireless sector has become quite extended away from its 20-day MA and began showing signs of topping out last week. We will initiate a short position on a break of its 2-day low. Only looking to profit from a small correction in the index, which remains strong overall.
WMH does not trade much volume each day, but that is not relevant with ETFs, which are synthetic instruments. Remember that $IWH.X is the index which tracks WMH, so you may want to follow $IWH.X to track the price of WMH because it has much more narrow spread and shows you an accurate fair value of the WMH ETF. Always use limit orders when trading WMH.
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.
IWM short (from Jan. 21) –
shorted 118.73, new stop 119.85, new target 114.50, unrealized points = + 0.01, unrealized P/L = + $1
DIA short (full position, from Jan. 6 and Jan. 9) –
shorted 105.27 (avg.), stop 107.55, target 100.50, unrealized points = (0.59), unrealized P/L = ($118)
We cancelled Friday’s short trigger in MDY on Friday due to relative strength in the mid-caps. However, we remain short both DIA and IWM.
Founder and President