The broad market began yesterday with an opening gap down that caused each of the major indices to open just below their respective lows of the previous day. The S&P 500, Dow Jones, and Nasdaq each attempted to rally and “fill the gap” after the first thirty minutes of trading, but the reversal attempt failed, causing each of the indices to quickly set new lows and settle into a downtrend that lasted throughout the remainder of the morning session. After finding support near last week’s lows, both the S&P 500 and Nasdaq Composite bottomed out at 12:30 pm EST. The Dow Jones Industrial Average also found support at the same time, although it showed relative weakness and traded below last week’s low. Interestingly, the major indices reversed and settled into an uptrend during the afternoon session. The broad market still closed lower on the day, but losses in many of the indices were significantly reduced by the afternoon reversal. At its intraday low, the S&P 500 Index was down 1.4%, but the afternoon rally enabled the index to halve its losses and close only 0.7% lower, as did the Dow Jones. Similarly, the Nasdaq Composite was down 1.7% at its worst level, but closed only 1.0% lower.
Yesterday’s total market volume was 3% higher in the NYSE and 11% higher in the Nasdaq. Since each of the indices closed with losses and on higher volume, this means yesterday was technically another bearish “distribution day” in the broad market. Given that the Nasdaq had previously risen for three consecutive sessions, but on declining volume each time, it was not surprising to see an increase in volume on the Nasdaq’s first down day. Obviously, this is the exact opposite price to volume relationship you would see in a healthy bull market. Negative breadth also confirmed yesterday’s weakness, as declining volume outpaced advancing volume by a margin of 4 to 1.
If you paid attention to our support and resistance commentary in yesterday’s newsletter, it should have been helpful to you in predicting where the major indices would find support yesterday. As expected, the April 30 lows acted perfectly as support and enabled the major indices to bounce in the afternoon. The S&P 500 Index perfectly formed a double bottom (at least in the short-term) at its prior low of 1107. However, the Dow Jones Industrial Average showed relative weakness to the S&P and traded well below its prior low. The chart below illustrates this divergence between the S&P and Dow. The horizontal blue lines mark the prior April 30 lows in both indices:
Although not illustrated, the Nasdaq Composite also found support at its prior low. In fact, the Nasdaq showed slight relative strength because it was the only one of the major indices that reversed without actually dropping all the way down to its prior low. These patterns of divergence tell us that the blue-chip Dow stocks were the weakest, while the tech-heavy Nasdaq held up better. These divergences are important to realize because the same pattern will often carry through into the next several days of trading. By knowing this information, you can increase your odds of profitability by positioning yourself short the weakest sectors and indexes and long the strongest ones. This is exactly what we did in the MTG Intraday Real-Time Room yesterday, and it enabled us to profit from the short side of the market in the morning and the long side in the afternoon.
Going into today, keep an eye on yesterday’s lows in the major indices, which would serve as an important support level. If those lows are broken, it means the double bottom at last week’s lows will have failed. If this occurs, the next support levels would be found all the way down at the March lows. Price resistance will be found first at yesterday’s highs, then all the way up to the previous day’s highs. Unless volume picks up, there will be too much overhead supply for the indices to climb much higher. Curiously, the Nasdaq Composite closed right on its 200-day MA, at 1937, so this level continues to be one to watch closely. A closely watched employment report will hit the markets at 8:30 am EST today and this is likely to have a great impact on today’s market tone. As always, obey your protective stops on both sides of the market and remember to trade what you see, not what you think!
Today’s watch list:
There are no new plays for today. We will, however, send an e-mail update when/if we enter any new ETF swing positions 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.
IWM short (HALF position, from May 6) –
shorted 112.15, covered 111.12, points = + 1.03 net P/L = + $56
SPY short (HALF position, from May 3) –
shorted 112.15, covered 112.31, points = (0.16), net P/L = ($17)
IWM short (HALF position, from May 6) –
shorted 112.15, new stop 112.30, target 109.50, unrealized points = + 0.11, unrealized P/L = + $5
Per intraday e-mail alert, we covered the SPY short when it rallied above its 30 minute high after yesterday’s gap down. We also shorted IWM after it broke to a new 20-minute low, covered half the position for a + 1 point gain, and took the remaining shares overnight.
Edited by Deron Wagner,
MTG Founder and