Institutional sector rotation was clearly evident yesterday, as last week’s lagging sectors began showing strength, while the formerly leading sectors took a rest. The Nasdaq Composite Index participated in a stealth rally yesterday, while the S&P 500 and Dow Jones Industrials chopped around in a narrow 5-point range. This is the exact opposite pattern of last week’s action, in which we saw relative strength in the S&P and Dow while the Nasdaq trended steadily lower. The Biotechnology sector was responsible for yesterday’s leadership in the Nasdaq, as many individual stocks showed strong volume and closed at new 52-week highs. This enabled the Nasdaq Composite to break its 4-day losing streak and close with a gain of 1.2%, although the Biotech Index ($BTK) closed with an impressive gain of 2.8%. The Pharmaceutical, Banking, and Oil Service indexes each took a break from their recent gains yesterday, which caused the S&P 500 Index to close with fractional gain of 0.1%, while the Dow Jones closed with a loss of 0.1%.
Given that the Nasdaq closed last week with four consecutive days of losses, it was not surprising to see a bounce in the index yesterday. However, the one problem is that total market volume in the Nasdaq declined by 10% versus the previous day, while volume in the NYSE dropped off by more than 19%! While the 1.2% gain in the Nasdaq was positive, yesterday’s volume was significantly lighter than it was on any single day of losses the Nasdaq experienced last week. This tells us that yesterday’s gains were more the result of a temporarily lack of sellers rather than an abundance of buyers. If the percentage gain is the same either way, why does this matter? The distinction is important because when a market rallies on declining volume, a few big institutional sellers stepping in over the next few days can cause the market to easily give back all its gains. Conversely, if a market rallies on higher volume, it indicates increased demand and enables the market to absorb any sellers that may subsequently appear. This is why we always pay such close attention to the relationship between price and volume every day.
Although volume was light, yesterday’s gain in the Nasdaq Composite Index put the index back above both its 20 and 50-day moving averages, as well as above the 200-week moving average. These moving averages should now act as the new support levels if the Nasdaq retraces today. Support of the 20-day moving average is at 2,004, while support of the 50-day average is at 2,014. The ever-important 200-week moving average is now at 2,012, which is 8 points below yesterday’s close. If the Nasdaq can close this week above that 200-week moving average, it will be bullish and could position the index for a decent rally over the next month. But, we’ll worry about that after we see how the Nasdaq performs for the remainder of the week. The weekly chart of the Nasdaq Composite below illustrates how the 200-week moving average has acted as resistance for all of 2004, but could become the new support level IF the Nasdaq is able to hold above it:
As for short-term resistance on the Nasdaq, watch the 2,028 and 2,039 levels, which are the 50% and 61.8% Fibonacci retracement levels from the high of April 13 down to the low April 16.
Both the S&P 500 and Dow Jones Industrials have been hanging out either just above or below their 50-day moving averages for the past two days. This volatility contraction will probably lead to a big move in either direction within the next day or two, so be prepared for a confirmed break above or below the 50-day moving averages. Which direction they will go is difficult to predict, but recent volume patterns would suggest lower UNLESS volume suddenly spikes on a day of upside gains. The S&P 500 Index closed at 1135.80 yesterday, which is less than 2 points above its 50-day MA. The Dow Jones Industrial Average closed yesterday at 10,437, which is 10 points BELOW its 50-day MA. Due to the proximity of these indices with their 50-day MAs, many traders will have their eyes on these pivotal levels over the next day or two.
Finally, remember that earnings season is in full swing and the market’s interpretation of quarterly earnings reports is likely to be the driving factor of the market’s next major move. Click here for a calendar of companies who are reporting earnings. Earnings aside, there are many mixed signals that make us think sitting on the sidelines, as many institutions are doing, is probably a good idea. One could make as many bullish technical arguments as bearish arguments, so the best plan is to either be hedged on both sides of the market or remain mostly in cash. The major indices are at a pivotal point now, and the strength or weakness of this week’s closing prices is likely to determine the intermediate-term trend from here.
Today’s watch list:
There are no new plays for today.
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.
DIA short (from April 16) –
shorted 104.46, stop 105.10, target 102.25, unrealized points = (0.01), unrealized P/L = ($2)
SPY short (from April 19) –
shorted 113.37, stop 114.30, target 111.40, unrealized points = (0.46), unrealized P/L = ($92)
We shorted SPY per yesterday’s newsletter. Remember to use the MTG Opening Gap Rules to manage positions in the event of an opening gap up to the stop prices. This means we will mark the highs of first 20 minutes and adjust the stop to just above those highs. Will send e-mail update if/when we trail any stops tighter today.
Edited by Deron Wagner,
MTG Founder and