A profit warning from cellphone maker Nokia yesterday morning caused an opening gap down in the major indices. But the broad market stabilized after the opening gap down and, like the previous day, spent the entire session in a narrow and sideways range. Relative strength could be seen in the Dow Jones Industrial Average, which grinded fractionally higher to a 0.1% gain by the close. The S&P also held up relatively well and closed with a loss of only 0.2%. The Nasdaq Composite, which diverged from the relative strength in the S&P and Dow, closed with a loss of 0.9%. Total market volume in the NYSE was basically unchanged, but volume in the Nasdaq was 4% higher than the previous day. Since the Nasdaq closed lower, but on higher volume, yesterday met the technical definition of a “distribution day.” However, despite the volume increase, it still came in at a below average level.
Yesterday’s mixed price action did little to change the current technical picture of the major indices. It was an “inside day” for many of the indices, which means they traded completely “inside” of their respective trading ranges of the previous day. When in an uptrend, an “inside day” often is a warning sign that the market’s direction is about to reverse. This is particularly true when the indices close in the middle or lower half of the previous day’s range as opposed to the upper third of the range. Volume patterns have once again turned bearish, as Monday’s rally came on lighter volume and yesterday’s drop in the Nasdaq occurred on higher volume. The daily chart of the S&P 500 Index below illustrates yesterday’s “inside day:”
The Russell 2000 Small Cap Index showed the most weakness of all the major indices yesterday and closed with a loss of 1.2%. For this reason, we initiated a short position in IWM (per intraday e-mail alert) after it broke below support of its uptrend line from the low of March 24. If IWM follows through to the downside, it will have formed a triple top near its 52-week high of 121, and will likely correct at least down to its 50-day moving average at the 116 area. The daily chart of IWM below illustrates how it broke below trendline support yesterday:
We may see some weakness in the Dow today due to a lower than expected earnings report from Alcoa after the close yesterday. It will be interesting to see how the market reacts to the second consecutive day of negative corporate earnings news, especially given that several of the major indices remain near their 52-week highs. As for our bias of today’s market direction, use yesterday’s highs and lows as a guide. If the major indices are trading below yesterday’s lows after the first 30 minutes of trading, odds are good we will see a downtrending day. Conversely, a sustained break above yesterday’s highs could catch the bears off guard and trigger a rally. As always, watch today’s volume in order to determine the severity and sustainability of any breakout or breakdown.
As an aside, please note the U.S. equities markets will be closed this Friday, April 9, in observance of Good Friday holiday. The Wagner Daily will not be published on Friday, but regular publication will resume on Monday.
Today’s watch list:
Since we currently have three open positions, there are no new trade setups for today. Instead, we will focus on managing the current positions.
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 short (from April 6) –
shorted 37.10, new stop 37.49, target 36.10, unrealized points = + 0.12, unrealized P/L = $48
IWM short (from April 6) –
shorted 119.53, stop 121.10, target 116.20, unrealized points = + 0.25, unrealized P/L = $25
BBH long (from April 5) –
bought 148.00, new stop 145.10, target 151.10, unrealized points = (1.50), unrealized P/L = ($150)
Per yesterday’s newsletter, we shorted QQQ and also shorted IWM per intraday e-mail alert. We remain long BBH, but have adjusted the stop to just below the 200-MA on the 60 min. chart. Remember that the MTG Opening Gap Rules apply with any position that gaps up or below its stop price on the open. Basically, we would wait for a break of the 20 minute high or low before closing the position.
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