Last Friday was a relatively uneventful day in the broad markets and acted much as you would expect on the day following a high volume rally. When the major indices trend sharply higher on any given day, the following day usually consists of a lighter volume consolidation day that enables the indices to digest their gains, which is exactly what occurred on Friday. The S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite each traded relatively sideways, within the upper third of Thursday’s range. Both the S&P 500 and Dow Jones closed 0.1% higher, while the Nasdaq Composite closed with a gain of 0.8%. The Russell 2000 Small Cap Index showed relative weakness and closed with a 0.4% loss, indicating the gain in the Nasdaq was largely due to strength in the large caps. Total market volume in the NYSE dropped by 22%, while volume in the Nasdaq dropped by 10%, which is what typically occurs on consolidation days that follow trend days. Overall, Friday’s action was a bit boring, but was bullish because the lighter volume correction by time, within the upper third of the previous day’s range, enabled the various intraday moving averages to rise up and provide support to the indices.
The most important technical levels to watch going into this week are the trendline resistance levels that we illustrated in last Friday’s Wagner Daily (you may want to reference that issue to refresh your mind). As you may recall, each of the indices are approaching resistance of their primary downtrend lines, which can easily be seen on the daily charts. Since Friday’s action was basically a non-event, those same trendlines remain the key resistance levels to watch going into the new week. A break above those downtrend lines, especially if volume increases, would be bullish and could enable each of the indices to rally back up to their prior 52-week highs. Support will first be found at Friday’s lows, and then at the 50% Fibonacci retracements from last Thursday’s rally.
In reviewing the weekly chart of the Nasdaq Composite, we noticed that the 200-week moving average, which formerly acted as resistance, is now acting as the new support at 2,015. The weekly chart of the Nasdaq Composite below illustrates this transition:
Based on the chart above, it appears that odds now favor higher prices in the Nasdaq during the next one to two months. However, the one potential snag is that the Semiconductor Index ($SOX) continues to show relative weakness below its 200-week moving average, which it failed to break above several weeks ago. The weekly chart of the $SOX below illustrates this:
Because the Semiconductor Index is so heavily weighted within the Nasdaq, it is rare for the Nasdaq to rally for an extended period of time without the $SOX leading the way. In fact, there is a saying among traders that, “As the $SOX goes, do does the Nasdaq.” If this is the true, the Nasdaq may be in for a choppy ride unless the Semis begin to show some strength.
Today’s watch list:
TTH – Telecom HOLDR Index
Trigger = above 28.23 (above last week’s high)
Target = 29.20 (resistance of prior highs on daily chart)
Stop = 27.85 (below Friday’s low)
Notes = The Telecom Index has been showing relative strength to the broad market lately and has just formed a “higher low” on its daily chart. Now the index is poised to break above the upper channel of its downtrend from the March high. It also closed back above its 50-day MA on Friday. We will look to buy TTH on a break above its 2-day high, which should enable this ETF to rally back up to its prior highs from March. Note that our profit target is only one point because TTH has a low beta. Therefore, you may consider adjusting your share size to compensate for less volatility with this trade. Use the MTG Position Sizing Model to assist you.
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 over the weekend.
Edited by Deron Wagner,
MTG Founder and