A stronger than expected jobs report sparked a broad-based rally last Friday and enabled each of the major indices to close with solid weekly gains. The S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite each gapped up above their respective highs of the previous day, drifted sideways, then closed near their intraday highs. The Nasdaq showed the most relative strength because it closed at its best level of the session, while both the S&P and Dow lagged slightly. Most importantly, volume in the Nasdaq surged 20% higher than the previous day, which made Friday a confirmed “accumulation day” that was represented by institutional buying. Last Friday was the first day the Nasdaq closed higher, and on significantly higher volume, since January 16. This enabled the Nasdaq Composite to close with a gain of 2.1% for the day and an impressive 4.9% for the week. Both the S&P 500 and Dow Jones closed with gains of 0.9% on Friday, and volume in the NYSE only increased 4% over the previous day. For the week, the S&P 500 Index closed with a gain of 2.9% and the Dow closed 2.5% higher.
Looking at the weekly charts of the major indices, you will notice that last Friday’s rally enabled each of the major indices to push through some key resistance levels, particularly in the Nasdaq Composite. Going into the beginning of last week, the Nasdaq Composite had perfectly bounced off support of its 40-week moving average, which we profited from with a long position in QQQ. However, you will recall that resistance of both the 10 and 200-week moving averages had converged as overhead resistance at the 2,025 area. The 200-week moving average had acted as resistance in the Nasdaq for TEN consecutive weeks, but Friday’s high volume rally enabled the index to close firmly above this resistance level. The weekly chart of the Nasdaq below illustrates how the Nasdaq finally broke through and closed above resistance of its 200-week moving average for the first time since the week of January 16. Notice also how the 40-week MA marked the exact low of the correction, two weeks ago:
Obviously, this break of weekly resistance on the Nasdaq is bullish and the 2,025 area should now act as the new support level. Remember that prior resistance becomes the new support once that resistance level is broken. Looking at the shorter-term daily chart of the Nasdaq, you will also notice that the 50-day moving average is at 2,022, only a few points below the 200-week MA. Therefore, the 50-day MA should further act as support going into this week. Take a look at the daily chart of the Nasdaq Composite:
Needless to say, we expect the multiple moving average convergence at the 2,020 to 2,025 area to act as key support in the Nasdaq during the coming week. On the upside, the next area of resistance will be the prior highs of 2,065 to 2,070, which were set at the beginning of March. Given Friday’s breakout, I would view any pullback in the Nasdaq as a chance to buy the strongest technology-related ETFs and stocks, particularly in the Semiconductor ($SOX) and Hardware ($HWI) indexes. SMH (Semiconductor HOLDR) closed above its 50-day MA for the first time since mid-February. The Biotechnology sector ($BTK) also broke out on Friday, so you may want to keep an eye on BBH (Biotechnology HOLDR) for possible long entry.
Like the Nasdaq, the S&P 500 Index also closed last week above resistance of its 50-day MA. Last Friday was the first time the index closed above its 50-day MA since March 9. The S&P also closed above resistance of both its 200 and 10-week moving averages as well. Therefore, support in the coming week should be found at the 1,133 to 1,135 area, which is approximately 7 points below Friday’s closing price of 1,141. Between the S&P and the Nasdaq, odds probably favor being long the Nasdaq because the breakout was more significant and the volume increase confirmed the breakout more so than in the NYSE. Therefore, being long QQQ or ONEQ is probably a better bet than SPY.
The Dow has been the laggard of the major indices and only closed above its 50-day MA by 5 points on Friday. The index also closed right at resistance of its 10-week moving average. The Dow has a lot of overhead price resistance from its prior highs of February, so this may be the first index to short IF the broad market begins to head south again. At this point, there is no good technical reason to be aggressively short the broad-based ETFs because each of the major indices closed above key resistance levels on Friday. However, if last week’s gains were to suddenly evaporate, the Dow (and DIA) is likely to be the first index to drop.
Overall, we enter today with a cautiously bullish stance. Given the substantial gains of Friday, there is a good chance the major indices will trade sideways and correct by time today. This would enable the broad market to digest its recent gains and allow the intraday moving averages to rise up and provide support. While a correction by time is always healthy for the market, it usually reduces the number of intraday trading opportunities as well. We’ll have a much better idea how to approach the rest of the week after we see how well the major indices are able to retain Friday’s gains. Given how fast the market has recovered off its lows, caution is warranted on the long side of the market. But, even more caution is necessary on the short side because of last week’s breakout.
Today’s watch list:
BBH – Biotechnology HOLDR
Trigger = 10 cents above the high of first 20 minutes
Target = 151.10 (just below resistance of prior high)
Stop = 145.40 (below Friday’s intraday support)
Notes = Rather than using a concrete trigger price for long entry, we will look to buy BBH only if it breaks above its high of the first 20 minutes. If the high of the first 20 minutes is not broken, we will not buy BBH today. If, however, BBH breaks to a new high after 20 minutes, we will buy it and use a stop of 145.40. Using this type of trade entry provides us with the maximum profit potential with minimal risk because a break above the 20-minute high is likely to confirm a resumption of Friday’s breakout. Note that BBH is quite volatile and, as such, the MTG Position Sizing Model dictates a reduced position size when trading it.
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 on Friday and all cash over the weekend.
Founder and President