Commentary:

Yesterday was a real “snoozer” of a day, as the major indices each spent the entire day trading flat and on light volume. After opening with a small opening gap up, the broad market simply did nothing. The S&P 500 Index, for example, spent nearly the entire day trading sideways in an extremely tight and narrow 4-point range. This was likely attributed to the price resistance from the prior high of February 2, which we discussed in yesterday’s newsletter. Price action in the Nasdaq and Dow Jones Industrial Average was similarly boring. Minor selling pressure hit the broad market during the final 90 minutes of trading and caused each of the major indices to close with small losses. The S&P 500 Index closed 0.3% lower, the Nasdaq Composite Index closed 0.2% lower, and the Dow Jones Industrial Average lost only 0.1%. Regardless of the late afternoon selloff, intraday trading opportunities were quite limited because many individual stocks and ETFs lacked volatility and volume. We made one intraday trade in the Intraday Real-Time Room yesterday morning, but spent the rest of the day fully in cash. Rather than taking mediocre trade setups, we always wait until trades with positive risk/reward ratios present themselves. If they don’t present themselves, we exercise patience and discipline to do nothing.

One of the reasons trading was so lethargic yesterday is that volume once again declined. Total market volume declined by 11% in the NYSE and 5% in the Nasdaq. When volume declines in a market, volatility often tends to decrease as well, which makes it more challenging to find quality trade setups. Recall that volume also declined last Friday, when each of the major indices rallied. So, let’s put this all together. Yesterday was a lighter volume sideways day, which came on the heels of a lighter volume rally day. What does yesterday’s price and volume action tell us? Nothing really. But, the broad market’s recent inability to have “accumulation days,” in which an index closes higher AND on higher volume, should serve as a warning sign to the bulls. While the Nasdaq has had four confirmed “distribution days” over the past two weeks, there have not been any “accumulation days.” If this pattern continues, the major indices will not be able to hold on to their impressive gains of the past year.

Due to yesterday’s trading action essentially being a non-event, nothing technically changed going into today. In a healthy bull market, we would expect to see upside follow through on the day following a bullish consolidation day. But, unless volume suddenly increases, this is not likely to happen. Was last Friday’s rally the last gasp for the bulls before the market enters into an intermediate term correction? I have no idea, but we will certainly be able to make a much better educated guess if we continue to focus on the relationship between price and volume in the broad market. Paying attention to how well individual leading stocks hold on to their recent gains will also yield important clues. A break below last week’s lows in the major indices would obviously be quite bearish because it would cause the Nasdaq to drop below support of both its primary uptrend line and its 50-day moving average. However, that is not likely to happen today because last Friday’s rally put us significantly above the low. Be cautious against overtrading in the current environment, especially if volume remains light.

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Today’s watch list:

DIA – DIAMONDS (Dow Jones Industrial Average Index)
Short

Trigger = below 105.60
(below the 20-day MA)
Target = 103.50 (test of the 50-day moving average)

Stop = 106.52 (above yesterday’s high)

Notes = The Dow has been showing relative weakness and has been unable to follow-through on Friday’s gains after breaking back above its 20-day MA. Therefore, we feel a cross back below the 20-day MA will further trap the bulls and cause a sharp selloff down to the 50-day MA. As per the trigger above, we will only short DIA on a break below its 20-day MA at 105.60.

In addition to the DIA setup, keep an eye on the Broker-Dealer Index ($XBD) for potential shorts. The index has bounced into resistance after breaking down last week and appears that the next move is lower in many of these stocks. There is not an ETF specifically for broker-dealer stocks, but check out LEH, BSC, and MER for potential short trades. XLF (Financial ETF) is another possibility on the short side.

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HHH – Internet HOLDR
Short

Trigger = below 50.75
(below yesterday’s low)
Target = 49.10 (test of the prior low)

Stop = 51.49 (above yesterday’s high)

Notes = HHH broke down last week, has bounced a few days to correct, but now appears that it will head back down to at least test its prior low. Confirmation would occur on a break below yesterday’s low, which formed a “doji star” candlestick pattern. Remember that $HHI.X is the index that tracks HHH, so you may wish to follow the price action of the index instead because it gives you a more accurate idea of the fair value without the wide spread. Remember the MTG Opening Gap Rules in the event of an opening gap down below the trigger price.

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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:

(none)

Open Positions:

(none)

Notes:

We are currently flat (all cash).

Edited by
Deron Wagner,
MTG
Founder and President