Yesterday was a day of major price divergence, as the S&P 500 and Dow Jones Industrial Average squeaked by with small gains of 0.1%, but the Nasdaq Composite showed relative weakness and closed 1.1% lower. Like Tuesday, the Nasdaq Composite Index spent the entire day in a steady intraday downtrend, but closed just above the psychologically important support level of 2,000. The Semiconductor ($SOX) Index, which closed with a 2.9% loss, was largely responsible for the weakness in the Nasdaq. However, strength in the Pharmaceutical ($DRG) and Oil Service ($OSX) sectors caused both the S&P and Dow to have relative strength and close positive yesterday. While the Nasdaq closed well below the prior day’s low, the S&P and Dow both closed within the prior day’s range and formed a triple bottom over the past two days. Total market volume in the NYSE increased by 2%, while volume in the Nasdaq increased by 7%. This means yesterday was the second bearish “distribution day” in the Nasdaq within the past week.
As I wrote about in my first book, The Long-Term Daytrader, one of your best strategies on days like yesterday is to buy the specific industry sectors that have relative strength and short those with relative weakness. If you sorted all the primary sectors by percentage change yesterday, you would have easily noticed much strength in the Pharmaceutical Index ($DRG), and major weakness in the Semiconductor Index ($SOX). As the Pharmaceutical Index trended steadily higher all day, the Semiconductor Index trended steadily lower. If you observed this early in the day, you could have profited on both sides of the market through simultaneously buying PPH (Pharmaceutical HOLDR), while shorting SMH (Semiconductor HOLDR). In fact, the HOLDRS and iShares series of ETFs makes it easy to trade an entire sector without the need to pick individual stocks. To illustrate how well this concept can work, take a look at the intraday charts of PPH and SMH below:
Looking at the daily charts, all the major indices are now stuck below their 50-day moving averages, which is likely to now act as resistance on any rally attempt. The 50-day moving average is currently at the following price levels: S&P 500 Index – 1133, Dow Jones – 10448, Nasdaq Comp. – 2015. It would be a good idea to write these levels down and keep them near your trading desk so that you are aware of these key resistance levels.
Going into today, we remain moderately bearish. Although there were select pockets of strength within the S&P and Dow yesterday, the weakness of the Nasdaq is likely to prevent the other indices from making much headway. There is quite a bit of overhead supply that has been created from the selloff in the Nasdaq this week, so it would require a lot of buying volume in order for the market to put in anything more than a small bounce. Therefore, if the market does attempt to rally, check out the volume compared to the past several days. If volume is high, then you need to be more cautious on the short side. However, if the rally attempt comes on feeble volume, be wary of getting long or covering short positions. Based on the recent price and volume patterns, the odds favor sideways to lower prices more than higher prices today. But as we always say, Trade what you see, not what you think!
Today’s watch list:
Since we already have three open positions, there are no new trade setups for today. Instead, we will focus on managing the open positions for maximum profitability and minimal risk. Currently short IWM, QQQ, and DIA, each with an unrealized gain, especially the QQQ short.
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 (HALF position, from April 6) –
shorted 37.10, new stop 36.25, target reached, unrealized points = + 0.95, unrealized P/L = + $190
IWM short (from April 15) –
shorted 115.83, stop 117.85, target 110.80, unrealized points = + 0.45, unrealized P/L = + $45
DIA short (from April 14) –
shorted 103.95, stop 105.05, target 102.20, unrealized points = + 0.07, unrealized P/L = + $14
IWM short triggered per yesterday’s newsletter. We also remain short DIA and half position of QQQ, which hit its profit target of 36.10 yesterday. Note the new, tight stop on QQQ to lock in gains.
Edited by Deron Wagner,
MTG Founder and