Breaking a five-day losing streak, each of the major indices closed higher yesterday, but a moderate decline in volume showed a lack of conviction in the rally. The S&P 500 gained 0.4%, the Dow Jones gained 0.3%, and the Nasdaq Composite closed 0.9% higher. However, total volume in the Nasdaq dropped 17%, while volume in the NYSE was 12% lower than the previous day. This tells us that yesterday’s gains were more the result of a temporary pause in the recent selling rather than an abundance of institutional buying. This means we are seeing a resumption of the broad market’s recent pattern of higher volume on the down days and lower volume on the up days. Obviously, this is the exact opposite type of price-volume relationship of what you would see in a healthy bull market.
On an intraday basis, the S&P 500 formed a “bullish ascending triangle” chart pattern yesterday. This pattern often results in a strong breakout during the last 90 minutes of trading, but the overhead supply of the past several days, along with the lack of high volume buying, caused the major indices to just chop around instead. Below is a 15-minute chart of yesterday’s price action in SPY (S&P 500 Index) that illustrates the numerous times it attempted to break out, but failed:
In the bigger picture of the past week, yesterday’s low-volume rally appeared to be nothing more than a simple price correction, rather than any type of trend reversal. We say this because both the S&P and Dow were unable to rally much beyond the 38.2% Fibonacci retracement level from the high of February 19 down to the low of Feb. 24. The less of a retracement in the opposite direction of a trend, the more likely the trend is to resume in the prior direction. Put simply, the S&P and Dow simply did not retrace a very large percentage of the selloff from the prior five days, which means we are likely to re-test the lows and probably go lower within the next day or two. Below is an hourly chart of DIA (Dow Jones Industrial Average) that illustrates how the 38.2% Fibo retracement acted perfectly as resistance yesterday:
Generally speaking, a trend will not reverse unless an index has corrected at least to its 50% or usually its 61.8% Fibo retracement level. Therefore, as long as the Dow and S&P both remain below their 50% retracement levels from the selloff of the past week, our bias remains to the short side.
As I have been saying the past several days, there still seems to be a better risk/reward ratio to short sectors and stocks in the S&P and Dow versus the Nasdaq. For that reason, we remain short HALF position size of both SPY (S&P 500 Index) and DIA (Dow Jones Industrial Average), although we covered half the position size yesterday when the S&P initially broke out in the morning. The 2,000 support level seems to be holding up the Nasdaq pretty well, so it could be tricky to short the Nasdaq, or related sectors, unless the 2,000 price support is broken. Conversely, the S&P and Dow are still above their 50-day moving averages, as well as their prior “swing lows.” As long as the broad market remains heavy, and we think it will, odds are good the S&P and Dow will continue to “catch up” to the weakness in the Nasdaq, which has already broken to a “lower low” on its daily chart.
Today’s watch list:
We will be adding the SECOND HALF of the SPY and DIA short positions only IF the following prices are broken today:
SPY short half position – BELOW 114.15
DIA short half position – BELOW 105.65
Stops will stay the same as they are with the current half position of each one.
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 (HALF position, from Feb. 24) –
shorted 105.94, covered 106.09, points = (0.15), net P/L = ($16)
SPY short (HALF position, from Feb. 24) –
shorted 114.31, covered 114.70, points = (0.39), net P/L = ($40)
DIA short (re-entry, from Feb. 24) –
shorted 105.94, stop 106.60, target 104.35, unrealized points = (0.25), unrealized P/L = ($25)
SPY short (re-entry, from Feb. 24) –
shorted 114.31, new stop 115.35, target 112.60, unrealized points = (0.56), unrealized P/L = ($56)
Per intraday e-mail alert, we covered HALF of the short positions in SPY and DIA yesterday, but kept the remaining half position open. Adjusted stops are above.
Founder and President