Commentary:

One of the biggest mistakes beginning traders can make is to make
assumptions about the markets based on “common sense”. By common sense I mean to
expect price action that would be “logical” for lack of a better word. From
March 8th to March 11th, the markets moved straight downward and sold off for
four straight days. All over the web and TV were reports of the market being
“oversold” and “due for a bounce”. After four days down, this would certainly
make sense. However, the markets do not make sense. They simply move
along paths of least resistance and will continue to move that way as long as
they have a good supply of fuel (volume) to power them.

Although a minor
one day bounce did occur on Friday, no real strong move to the upside ever
materialized as the Dow, S&P 500 and Nasdaq Composite all closed yesterday
at Thursday’s swing lows. How many bulls do you think got trapped yesterday when
the follow through above Friday’s highs that should have “logically” have
occurred did not? Lots, I am sure.

The big question is of course, why?
Why did a market that sold off very hard for four straight days, only bounce one
day and then move back to its swing lows? The answer, of course, lies in the
volume patterns. Let’s go back to Friday again. As discussed in yesterdays
newsletter, Friday’s advance was on very weak volume compared to the downdraft
that occurred between Monday and Thursday. The market simply cannot sustain
prolonged upward movement without the fuel (institutional volume) to push it
higher. Looking a bit deeper under the hood, a closer analysis of the market
internals that were in play on Friday tells more of the tale. In our Intraday Real Time Room,
we announce overall volume in relation to the previous day at 11:00 am and
again at 2:00 pm. Both readings on Friday came in between 25 to 35 percent lower
than on Thursday. This on both the NYSE and Nasdaq markets. Keep in mind that
this was happening on a day when the Dow ended the day up 112 points and the
Nasdaq up 41. Both decent sized percentage increases over the prior day’s close.
During the trading day, there were other key market internals that were out of
sync with the price action. Breadth, as measured by the difference between
advancing volume and declining volume was running extremely positive all day. By
afternoon, advancing volume was leading declining volume on the both the NYSE
and Nasdaq by over 4 to 1. Additionally, TRIN for both of those markets had an
extremely bullish reading the entire day. Yet, even though CNBC was able to
report that the Dow was up 112 points on Friday, those trading it intraday knew
that it was not much of an advance at all. The range on the Dow and S&P 500
was rather tight all day. The following chart illustrates Friday’s action
perfectly.

Notice how during the four days down, there were quite a few
large candles with big bodies. Large hourly candles are indicative of emotion.
Notice the difference in the size of the hourly candles on Friday. The small
bodies Friday are indicative of a lack of emotion on the part of buyers. When it
was apparent from the open that a lower low would not be made, there should have
been a lot more conviction on the part of buyers to step in and push the markets
notably higher. The internals, which essentially measure the difference between
the numbers of buyers and sellers and how much volume they are betting on their
opinions, were very positive all day. Yet the Dow gained exactly 109.45 points
over six and a half hours of trading on overall volume that was running 25-35%
lighter than its previous session all day. If you look back at the chart above
you can see that the Dow lost almost 193 points in just the last two hours of
Thursday. So, on the type of internals that would suggest a strong trending day
upwards, the broad market essentially only regained a little over 50% of what it
had lost between 2 and 4 pm the previous day!

This of course is what
set the stage for yesterday’s price action which did not follow through on
Friday’s “strength”. On Monday, all three of the major indices that we watch
moved lower and closed below the prior swing lows of Thursday. Looking at
the charts below, you can see that at this point there is really no strong swing
support anywhere below.

Now that this momentum to the downside has been established, we
would expect those 200 period moving averages on the dailies circled above to be
the next line of defense for the bulls. As discussed often in this newsletter
and in our Intraday Real Time Room, the 200 ma is the most powerful moving
average and often acts as a magnet for price action. Odds favor a move down to
these levels over the next few trading sessions.

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Today’s watch list:

(There are no
new plays for today)

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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)

Edited by Deron Wagner,
MTG Founder and
President