The broad market began yesterday with its recent pattern of low volume and weak price action, but Alan Greenspan’s testimony to the House of Representatives at 11 am EST immediately sparked a high-volume rally in the major indices. Greenspan hinted that the U.S. economy may grow at a faster pace than initially expected this year and that plenty of room still remains before rates need to be raised. The stock markets interpreted those comments as bullish and immediately reversed earlier weakness. Both the S&P 500 Index and Dow Jones Industrial Average gained 1.2% for the day, causing both indices to once again close at new 52-week highs. The Nasdaq Composite Index continued to lag behind and only closed 0.7% higher, which was nearly 3% below its 52-week high. Notice the price divergence on the daily charts of both the S&P 500 and Nasdaq Composite below:
The only bearish thing we spotted about yesterday’s price action was the Nasdaq’s relatively modest gains compared to the S&P and Dow. On a day when the Nasdaq traded over 2 billion shares, one would normally have expected a larger gain than 0.7%. As you can see from the chart above, the Nasdaq closed just below resistance of its 20-day moving average. More importantly, the Nasdaq also closed right at resistance of its 200-week moving average, which we discussed yesterday as being a key resistance point.
From a technical viewpoint, the most bullish factor about yesterday’s broad-market rally was the higher volume that accompanied the price gains. Total market volume in the NYSE increased by 23% over the previous day, while volume in the Nasdaq was 31% higher. Since each of the indices closed higher and on higher volume, this means that yesterday was technically an “accumulation day” in which institutions were supporting the rally. As you know, the past several weeks have consisted of higher volume down days and lighter volume up days, so it was refreshing to see the broad market’s first “accumulation day” in nearly a month.
Based on the strong price divergence between the S&P/Dow and Nasdaq, it appears that the lowest risk stocks and sectors to buy are those that are within the S&P or Dow, as opposed to the Nasdaq. Since both the S&P 500 and Dow Jones closed at new 52-week highs, there is technically no recent overhead price resistance that either index needs to contend with. However, remember that the risk of buying a breakout to new highs increases with each subsequent breakout. In the Nasdaq, conversely, there remains a lot of both price and moving average resistance. This does NOT mean we recommend shorting the Nasdaq here because there is no clear reason to do so at this time. It simply means that the lowest risk long entries can probably be found in sectors such as Gold and Silver Mining, Retail, Oil, and Pharmaceuticals. Each of those sectors has been showing a lot of strength over the past few days. Nasdaq-related sectors such as Semiconductors and Internets have been lagging behind and are probably not the best places to buy right now unless we begin to see sector rotation back into those sectors. If the Nasdaq begins to catch up with the pace-setting S&P and Dow, we will be less cautious about entering new long positions. But, until then, keep a close eye on the Nasdaq because the S&P and Dow are historically not likely to go much higher without the Nasdaq leading the way.
Update. . .both Retail Sales and Initial Jobless Claims reports, released at 8:30 am EST today, missed consensus estimates. So far, it has only had a minor negative reaction to the futures markets. But, just wanted to give you a heads-up that you should observe the price action in the first 30 minutes of trading today before entering any new positions.
Today’s watch list:
TTH – Telecom HOLDR
Trigger = above 29.25
(breakout above consolidation)
Target = 31.10 (Fibonacci extrapolation)
Stop = 28.50 (below the 20-day MA)
Notes = TTH has been consolidating at its highs for six weeks and now appears poised to break out to new highs. However, remember the MTG Opening Gap Rules, which means we will only buy TTH on a break above its 20-minute opening high. Note also the high volume over the past few days.
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.
HHH short (from Feb. 10) –
shorted 50.75, covered 51.50, points = (0.75), net P/L = ($156)
We shorted HHH yesterday, per the newsletter. DIA short did not hit its trigger price for entry yesterday.
Founder and President