The major indices were granted a temporary reprieve of last week’s heavy selling on Friday, as volume in the NYSE and Nasdaq dropped 15% and 27% respectively. Although volume dropped versus the previous day, there remained a lack of buying interest and each of the major indices spent the day trading in a narrow, sideways range, consolidating near their lows of the previous day. The Nasdaq Composite Index, Dow Jones Industrial Average, and S&P 500 Index closed with losses of 0.1%, 0.2%, and 0.3% respectively. The broad market’s inability to rally into the end of the week caused the technical picture to look very different going into this week than it did at the beginning of last week. Let’s start off the week by taking a look at the technical state of each of the major indices.
The S&P 500 Index broke its 9-week winning streak, the longest since 1989, and closed with a loss of 0.9% last week. As you may recall, the S&P 500 Index barely closed positive the previous week and actually formed a “doji star” candlestick, which often precedes a price reversal, on its weekly chart. So, it wasn’t too surprising to see the index break its winning streak. Despite last week’s loss, the S&P 500 Index remains six points above its 200-week moving average, which is presently at 1125. The 200-period moving average is always a powerful support/resistance level on any time frame, but a weekly chart is one of the most powerful and important. This 200-week moving average should now act as solid support going into this week, but a break below it would definitely increase the odds of a significant market correction. Looking at the daily time frame, Friday’s small loss also put the index back below its 20-day moving average. All three of the major indices are now below their 20-day moving averages, but are well above key support of their 50-day moving averages. The longer the indices remain below their 20-day moving averages, the more the 20-day MA will act as overhead resistance. The weekly chart of the S&P 500 Index below illustrates the break of the winning streak, as well as support of the 200-week MA.
The Dow Jones Industrial Average traded in a similar fashion to the S&P 500 last Friday and closed the week with a loss of 0.8%. It was the Dow’s second consecutive week of losses, although last week’s loss was fractional. Unlike the S&P 500, the Dow remains well above its 200-week moving average, which is at the 9,700 area. On the weekly chart, the next key support for the Dow is its 10-week moving average at 10,281. Similarly, the 50-day moving average is at 10,223. So, if the Dow is unable to gain this week, expect it to head down to support at the 10,200 – 10,300 level, which is about 200 points lower than last Friday’s close. Unlike last month, the Dow has begun showing relative weakness to the rest of the broad market. For this reason, we remain short DIA as an intermediate-term trade.
Like the Dow, the Nasdaq Composite closed lower for the second consecutive week. The Nasdaq lost 2.7% last week, which was its biggest weekly loss since September of last year. The Nasdaq also broke and closed below its 200-week moving average, which it traded above for only one week. Friday was the fourth consecutive day of losses for the index. Surprisingly, you have to go all the way back to August of 2003 to find the last time the Nasdaq had four consecutive losing days. More importantly, three of last week’s losing days were on higher volume, meaning the index had three bearish “distribution days” last week, which is usually a sign of institutional selling. I would not be surprised to see a bounce today, especially in the Semiconductor ($SOX) Index, but it will probably be short-lived. While anything is possible, it seems likely the index will test support of its primary uptrend line and 50-day moving average, just over the 2,000 price level, before going much higher. As you may remember from last week’s annotations, the primary uptrend line for both the Dow and S&P 500 also converges with their 50-day moving averages.
Going into today, we feel there is a good chance the major indices will break below last week’s lows. The main reason we feel this way is the fact that the broad market simply corrected by time last week as it consolidated near the lows. When an index drops, it will usually either correct by price or time. A correction by price simply means the index will bounce off the lows, which enables it to meet the moving averages that are acting as overhead resistance. Conversely, a correction by time means the index trades sideways, consolidating near the lows, rather than bouncing. This enables the moving averages to descend and meet the price of the indexes. Of the two, a correction by time is more bearish because it means there were not enough buyers to cause a significant bounce. Instead, the sellers simply went away for a while, which enabled the indexes to trade sideways. Just a consolidation at the highs usually leads to new highs, a consolidation at the lows (correction by time) usually leads to new lows. If, however, the major indices do bounce, remember to use your Fibonacci levels to predict how high the indices will bounce. As long as the bounce is less than 38.2% off last week’s lows, the short-term trend remains lower.
Today’s watch list:
There are no new plays for today, although we currently have two open positions (listed below).
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.), new stop 106.60, target 100.50, unrealized points = + 0.19, unrealized P/L = + $38
SPY short (from Jan. 30) –
shorted 113.26, stop 114.60, target 110.60, unrealized points = (0.22), unrealized P/L = ($44)
Per last Friday’s newsletter, we shorted SPY for swing trade, and also remain short DIA.
Founder and President