The broad market continued its recent pattern of bullish price to volume action, as each of the major indices rallied on higher volume yesterday. The S&P 500, Dow Jones, and Nasdaq Composite each gapped up to open near their respective highs of the previous day, rallied for the first hour, then traded in a narrow range for the remainder of the day. A minor sell program hit the broad market around 2:45 pm EST, but a surge of buying during the final 15 minutes pushed each of the major indices up to close near their intraday highs. Once again, the Nasdaq Composite led the broad market higher with a gain of 1.7%. The S&P 500 Index gained 1.3% and the Dow closed 1.1% higher.
Volume in the NYSE yesterday increased by 6%, while volume in the Nasdaq increased by nearly 9% versus the previous day. This marked the third consecutive day that the broad market has been exhibiting a bullish price-volume relationship. When the market rallied sharply last Thursday, it did so on greater volume than the previous day. The major indices then closed slightly lower on Friday, but on lighter volume. Then, the major indices followed through with yesterday’s gains that also occurred on higher volume than last Friday. This is the type of pattern the bulls want to see in an uptrending market, but there is one caveat to consider; yesterday’s increase in volume was not really that impressive because last Friday was the single lightest volume day of the year. Despite the increase, volume in both the NYSE and Nasdaq came in below its 50-day average. A surge above the 50-day average would have confirmed the presence of institutional buying, but it did not happen yesterday. Therefore, let’s not get too excited about yesterday’s “accumulation day” and increase in volume.
If you have been closely following our analysis of the Nasdaq, you should have been fully prepared for the weakness the index exhibited in the late afternoon because the Nasdaq rallied perfectly into resistance of its primary downtrend line, just below the 2,000 price level. This trendline resistance caused us to tighten the stop on our QQQ long position, of which we closed and netted a solid profit yesterday. The daily chart of the Nasdaq below illustrates how the downtrend line from the January high perfectly acted as resistance yesterday:
Needless to say, the above trendline, and hence yesterday’s high, is a key resistance level to watch going into today. Until the market proves otherwise, we need to assume the trendline will remain intact and will eventually cause the Nasdaq to head lower again. The trendline has been in place for two months and there is no reason to believe it will be broken at this time. If, however, the Nasdaq manages to break above the trendline, it will be bullish. In that case, next resistance is convergence of both the 10 and 200-week moving averages, around the 2,020 – 2,030 price level. As for support, expect yesterday’s low of 1,975 to act as support, as it is also just above the 20-day MA at 1,973. You can use the 20-MA on the hourly chart as a support level for the Nasdaq as well.
On the positive side, the S&P 500 Index rallied and closed above resistance of its 200-week moving average yesterday, which was at the 1,113 area. However, both the S&P 500 Index and Dow Jones Industrial Average closed right at resistance of their 20-day moving averages, which also converges with the prior highs of two weeks ago. We therefore expect yesterday’s highs to act as resistance in both the S&P and Dow. The chart of the S&P 500 Index below illustrates this resistance (the chart of the Dow looks similar):
Overall, our bias going into today is neutral and cautious. While volume patterns have been bullish over the past three days, overall volume on the upside has been light compared to average levels. The Nasdaq has rallied into resistance of its downtrend line, while the S&P and Dow have both rallied into resistance of their 20-day MAs and their prior highs. This leads us to believe that the major indices are likely to resume their prior weakness and begin heading back down again. But, today is likely to be choppy and act much as a typical reversal day. It may be a bit early to enter new short positions here without getting any confirmation first. Any major weakness would probably not happen until at least tomorrow, but be very cautious with any long positions you may have. We will probably remain in cash today until we see how the market acts around these key resistance levels, but will look to possibly enter new positions tomorrow, depending on today’s market action.
Today’s watch list:
As described in the last paragraph above, there are no new trade setups for today, but will re-assess tomorrow.
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.
QQQ long (from March 23) –
bought 34.58, sold 35.71, points = + 1.13, net P/L = + $452
SMH long (from March 23) –
bought 39.68, sold 39.70, points = + 0.02, net P/L = + $2
QQQ hit our trailing stop at 35.70, netting us a nice gain. We also bought SMH yesterday, but closed the position break-even when the Semiconductor rally failed in the afternoon. We are now flat.
Founder and President