The broad market’s bounce that occurred in the middle of last week fizzled out on Friday, causing each of the major indices to once again close the week lower. Though the indices closed above their worst levels of the week, the broad market’s inability to retain Wednesday’s gains was discouraging to the bulls. Friday afternoon’s sharp selloff made it clear that the bears remain in control, as they have been since we first pointed out to the bearish volume patterns in the broad market several weeks ago, before the bulk of the recent selloff even began. On a positive note, total market volume in the Nasdaq was 2% lower on Friday, but the NYSE volume was 6% heavier than the previous day. The quantity of bearish distribution days we have seen over the past two months was the leading indicator of the markets’ recent selloff. Conversely, we will continue to watch for signs of a high volume “up” day, which would be bullish and could possibly signal a short-term correction to the upside. The Nasdaq Composite, which has been the weakest of the major indices for the past two months, lost 2.2% for the week, while the S&P 500 lost 1.0%. The Dow showed a bit of relative strength and only dropped 0.5% for the week.
When the major indices were in a strong uptrend, we watched the 50-day moving average closely because it had acted as price support on numerous occasions during the prior year. However, each of the major indices are now well below support of their 50-day moving averages, which have now become the new resistance, rather than support levels. In order to determine the next major support for the indices, we now need to look at longer, even more significant moving average time frames, specifically the 100 and 200-day moving averages. We’ll begin by taking a look at the daily chart of the S&P 500 Index, the broadest-based major index:
As you can see from the chart above, the S&P is approaching support of its 100-day moving average (the green line). The most recent bounce off the 100-day MA support was in September of 2003, at which point the S&P promptly reversed higher. Given the difference between the bearish volume patterns of the past two months compared to those of last September, we don’t know if the 100-day MA will once again provide support, but it is worthy of keeping an eye on as we enter the new week. If the S&P breaks below the 100-day MA, the next major support is at the 200-day MA (the blue line), which is presently at the 1,054 area. As for resistance, last week’s high of 1125 is the first level to watch. Beyond that, the 50-day MA (purple line) should provide resistance at the 1,137 level. If you look at a weekly chart of the S&P 500, you will notice the index also closed below its 200-week MA for the first time in 10 weeks. Expect the 200-week MA, presently at the 1,115 level, to now act as resistance. Given the current sentiment of the market, we would view any bounce into these levels as a low-risk entry on the short side of the market rather than a place to buy stocks. Shorting at current levels carries greater risk than waiting for the bounce.
The Dow Jones Industrial Average once again closed below its 100-day moving average. Prior to the most recent break this month, it was the first time since April of 2003, nearly one year ago, that the Dow traded below its 100-day MA. This moving average, which is at 10,249, is a resistance level to watch going into this week, as is last week’s high of 10,328. The Dow is likely to find some psychological support at the 10,000 level, meaning that it will become a support level because people commonly place buy and sell stops at large round numbers such as 10,000. Technically, however, there is much more support around 9,800 than at 10,000. The 9,800 – 9,900 level acted as resistance from last October through December, so the numerous months of prior resistance should now become a significant support level as well. Interestingly, the 200-day MA also converges at this same area, presently at 9,794. So, the 9,800 area would be a good target to cover any short positions you may have in the Dow (or DIA). Take a look:
The Nasdaq Composite Index simply maintained its intermediate-term downtrend last week, which began when the first “lower high” and subsequent “lower low” was set on the daily chart over a month ago. The Nasdaq is well below support of its 100-day MA, but has support of its 200-day MA at the 1,885 area. Furthermore, the Semiconductor Index (SOX) also closed the week just above its 200-day MA, which should lend support to the Nasdaq. We have annotated the intermediate-term downtrend channels (the thick red lines) on the chart of the Nasdaq Composite below. Notice also how the 50-day MA (purple line) perfectly acted as resistance on the last major rally attempt. This is a good example of how a prior support level becomes the new resistance level once the support is broken. As long as the Nasdaq remains within the confines of the two trend channels, the trend remains down:
Today’s watch list:
SMH – Semiconductor HOLDR
Trigger = 10 cents above the 20-minute high ONLY (see notes below)
Target = n/a (will trail stop)
Stop = 15 cents below the low of first 20 minutes
Notes = We are looking to play a low-risk bounce off the 200-day MA in the SOX index. However, we will only buy SMH if it rallies above its high of the first twenty minutes of trading, which would give us good odds of a reversal day. But, if it never crosses above its highs of the first 20 minutes of trading, the play is not valid and we will not be buying. If SMH does trigger, the stop will be 15 cents below the low of first twenty minutes. The entry and stop strategies are a little different for this play, but we like the risk/reward of a fade on the long side of SMH here. We are not looking to make a huge profit on the long side, but just playing the bounce once we get confirmation (if it happens here).
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.
We were flat over the weekend.
Founder and President