Last week closed with a wild day of trading on Friday, but the actual closing prices of the major indices did not accurately reflect the extreme intraday volatility. The broad market began the day with a large opening gap down to the previous day’s lows, which was the result of a negative knee-jerk reaction to a U.S. payroll report that was released before the open. Within the first few minutes of trading, the Nasdaq Composite was down approximately 1%, with the S&P 500 Index and Dow Jones Industrial Average showing similar losses. But, traders used the opening weakness as a buying opportunity and caused each of the major indices to erase their losses within the first twenty minutes of trading.
After “filling the gap,” the major indices promptly saw another wave of buying which caused the S&P 500 to break out above the 1,160 resistance level and trade intraday at a new 52-week high. Although the morning action caused the Nasdaq Composite to reverse from a 1% loss to a 0.7% gain, the buyers dried up and the Nasdaq eventually drifted back down to close the day with a 0.4% loss. The S&P 500 and Dow Jones both continued their recent pattern of showing relative strength to the Nasdaq, and closed
with gains of 0.2% and 0.1% respectively. Both the S&P 600 SmallCap and S&P 400 MidCap indexes closed with gains and at new 52-week highs. Of the three major indices, none of them closed more than 0.4% above or below the previous day, but the intraday ranges were quite wide and extremely volatile. It was the kind of day where the bulls and bears alike could have easily sustained losses due to the indecision and erratic nature of the broad market.
While sharp reversals of large opening gaps are rather common, we found Friday’s reversal a bit surprising because the recent sentiment of the broad market has been bearish. Even more surprising was the late morning selloff that caused each of the major indices to give back approximately 50% of their gains off the intraday lows. Statistically, when a large opening gap down is filled within the first thirty minutes of trading, it usually results in the continuation of an intraday uptrend once the previous day’s highs are broken. This, in turn, typically leads to each of the major indices consolidating and closing at or near their intraday highs. Therefore, it was unusual to see such a strong reversal off the intraday lows that subsequently led to a moderate selloff only an hour later. We also found it interesting that the broad market did not really show conviction in either direction going into the close. Instead, each of the major indices closed near the middle of their intraday ranges and near their closing prices of the previous day.
Regardless of how we interpret last Friday’s price action, one positive factor was the solid increase in total market volume. In the NYSE, volume increased by 11%, while total market volume in the Nasdaq increased by 13%. It was the first day in two weeks that volume in the NYSE exceeded 2 billion shares, which was a pleasant change of pace. However, Friday’s erratic intraday action and mixed performance made it difficult to determine whether most of the volume occurred when the market was rallying or selling off. Technically, Friday was a bearish “distribution day” in the Nasdaq because the index closed lower on the day and on higher volume. Conversely, it was a technical “accumulation day” in the NYSE because the S&P and Dow both closed with gains, albeit minor ones, and on higher volume. This divergence confirms that we cannot know for certain whether Friday’s volume increase was bullish or bearish. Breadth readings were positive, as advancing volume outpaced declining volume by a margin of 2 to 1 in the NYSE, but the Nasdaq breadth was closer to flat.
Even with Friday’s loss, the Nasdaq Composite Index closed the week with a gain of 0.9%. After six consecutive weeks of losses, it is not surprising that the Nasdaq closed last week on the positive side. But, regardless of last week’s gain, the Nasdaq still has a lot of overhead resistance to contend with. Perhaps most importantly, the primary downtrend line from the January 26 high is still intact, despite several failed intraday attempts last week to close above it. As you may recall, the closely-watched 50-day moving average has also converged with that downtrend line, right around the 2,055 to 2,060 area. This convergence is making it even more difficult for the Nasdaq to get legs. The daily chart of the Nasdaq Composite below illustrates the overhead resistance of the primary downtrend line and the 50-day moving average:
Although not illustrated, the 200-week moving average acted as resistance on the Nasdaq for the sixth consecutive week, while the 10-week moving average marked last week’s high. Since the Nasdaq set a “lower low” on its daily chart two weeks ago and was unable to rally above the previous high during the past week, the index technically remains in an intermediate-term downtrend. If the Nasdaq gathers the momentum to rally and close above last week’s intraday high of 2,069, it will break above resistance of its primary downtrend line and 50-day MA, which would signal caution on the short side of the Nasdaq. But, unless that occurs, it is wise to continue trading in the direction of the overall intermediate-term trend, which is down for the Nasdaq.
The divergence between the S&P/Dow and the Nasdaq over the past several weeks is starting to become very interesting. It is rare for the S&P and Dow to continue trading near their 52-week highs while the Nasdaq trades in an intermediate-term downtrend. Nevertheless, both the S&P 500 and Dow Jones have been extremely resilient and refuse to correct. Scanning the daily charts of individual industry sectors, you will find that most technology-related sectors such as Semiconductors, Software, Hardware, and Internets have all been selling off over the past several weeks. Conversely, many “old economy” sectors such as Retail, Financial, Home Construction, and Oil Services have simultaneously been setting new 52-week highs. This divergence is simply caused by sector rotation, in which institutional money flows out of one sector and into another. In this case, it appears there has been a “flight to quality” and out of the more speculative sectors during the past several weeks. The clear divergence among industry-specific sectors is the reason we recently mentioned that your odds of profitable ETF trading right now are much greater if you look to trade the various sector ETFs and HOLDRS rather than the broad-based ETFs such as QQQ, SPY, or DIA. The current amount of indecision and choppiness in the broad-based ETFs is simply too difficult to manage for maximum profitability in the current environment.
One specific sector to keep an eye on during the coming week is the Gold and Silver Mining Index ($XAU). It appears that the recent price correction in the mining stocks has concluded and the sector is poised to resume its uptrend of the past year. Friday’s close in the $XAU put the index above resistance of its 50-day moving average and its primary downtrend line from the high of January 6. The daily chart of the $XAU index below illustrates this:
The break of the primary downtrend line illustrated above should result in a multi-day rally within the Gold and Silver mining sector. We anticipate the index will at least rally to test resistance of its prior high of 105, which was set on February 17. There is not yet an ETF that tracks the price of gold or gold stocks, although there continues to be rumors of the pending launch of one (click here to read an article about the new Gold Bullion ETF). Even though there is not yet a gold or silver ETF, you can easily create your own “synthetic” ETF by simultaneously trading a small basket of individual gold and silver mining stocks, many of which have similar chart patterns to the $XAU index. Leading gold mining stocks to consider are NEM, ABX, AU, and PDG. Popular silver mining stocks include CDE and PAAS. As always, use stops to protect against large losses if the breakout in the Mining index fails.
Today’s watch list:
EWJ – iShares Japan Fund ETF
Trigger = above 10.06
(breakout of consolidation)
Target = 10.90 (Fibonacci extrapolation)
Stop = 9.70 (below prior “swing low”)
Notes = This ETF did not trigger on Friday, but we are watching it again for a possible entry today. EWJ remains poised to make another leg higher if it can break past $10. Note that full position size of EWJ is 800 shares, based on the MTG Position Sizing Model. We trade larger position size of this one to compensate for low volatility. Also, remember to use the MTG Opening Gap Rulesin the event of an opening gap above our trigger price. This means that if EWJ gaps open above its trigger price, we will only buy it it subsequently breaks its 20-minute high.
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.
ONEQ short (from March 2) –
shorted 81.66, covered 81.87, points = (0.21), net P/L = ($50)
IWM short (HALF position, from March 2) –
shorted 117.96, covered 118.83, points = (0.87), net P/L = ($90)
We covered IWM over its 20-minute high and ONEQ at market when the broad market gapped down and reversed after the open. Due to the MTG Opening Gap Rules, the DIA short never triggered because it gapped down below its trigger price, but quickly reversed. The gap rules once again kept us out of trouble.
Founder and President