The major indices ended the week on a positive note, as the S&P 500, Nasdaq Composite, and Dow Jones Industrials each turned in solid gains on Friday. The day began with a moderate opening gap up that sparked a steady uptrend in the broad market during the morning. After consolidating near the intraday highs for several hours, the major indices each pushed to new highs during the final 90 minutes of trading. Due to strength in the tech sectors, and Semiconductors in particular, the Nasdaq closed with a solid gain of 2.2%. The S&P 500 closed 1.3% higher, but the Dow Jones Industrial Average showed relative weakness the entire day and only gained 0.9%. The Gold and Silver mining sector ($XAU), which we discussed last week, also rallied sharply on Friday and will probably follow through on those gains today.
The positive thing about Friday’s rally was that breadth was positive. Advancing volume outpaced declining volume by approximately 4 to 1, which confirmed the broad-based gains. However, the negative thing is that Friday’s volume declined by 5% versus the previous day. In the NYSE, volume was the lightest day in more than 5 weeks. In the Nasdaq, volume dropped off below its 50-day average. This means we are continuing to see the pattern of heavier volume on the down days and lighter volume on the up days. While the gains were broad-based, Friday’s light volume simply did not confirm the rally.
After closing at its 50-day moving average in the prior two days, the Nasdaq Composite bounced off the closely-watched level on Friday. This means that the primary uptrend from the low of last March, which converged with the 50-day MA, is still intact. On the upside, the 20-day moving average is likely to provide the next major resistance at 2094. More importantly, the 200-week MA is at 2089. Unless volume increases sharply on the upside, the Nasdaq is likely to have a hard time getting through that 2090 area.
The S&P 500 Index held above its pivotal 200-week moving average last week after testing it a few times. The index also pushed back above its 20-day MA on Friday, so expect both the 20-day MA and 200-week MA to provide support. The 200-week MA is now at 1123, while the 20-day MA is at 1135. As for resistance, pay attention to the Feb. 2 high, which is where the S&P closed on Friday. If the index fails to hold above that level, we will have the making of a double top. The hourly chart of SPY (S&P 500 Index) below illustrates this resistance level:
Because the major indices just broke out from consolidation on Friday, it’s unlikely that the broad market will close significantly lower today, despite Friday’s light volume. Unless total market volume increases today, the most likely scenario is that the broad market will trade in a narrow and choppy range. For now, we like cash the best. Due to the major indices’ reversal off key levels last week, broad-market shorts are now a bit risky, but going long is equally as risky because of the bearish volume patterns. Therefore, it seems cash is king right now. We can re-assess more accurately after we see whether or not today follows through on Friday’s rally and, more importantly, how the volume patterns play out.
Today’s watch list:
As mentioned in the commentary above, we don’t see a good risk in being either short OR long the ETFs right now and feel cash is the best play. However, if we spot any low-risk trade setups today, we will send an e-mail alert to subscribers (as always).
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 Feb. 4) –
shorted 114.18, covered 115.12, points = (0.94), net P/L = ($96)
SPY short (HALF position, from Feb. 5) –
shorted 113.10, covered 113.75, points = (0.65), net P/L = ($67)
DIA short (HALF position, from Feb. 5) –
shorted 105.03, covered 105.62, points = (0.59), net P/L = ($61)
Our open positions hit their trailing stops on Friday, so we are now cash. However, we currently have several open “swing” positions in the Intraday Real-Time Room. FYI, we are currently long SCHN with a multi-point gain and expect it to go a bit higher.
Founder and President