The broad market was very quiet last Friday, as each of the major indices closed near the flat line on the lightest volume of the year. The S&P 500 Index spent nearly the day in an extremely narrow, 4-point trading range before closing the day down 0.1%. The Nasdaq Composite Index also traded in a tight range, but closed with a meager 0.2% gain. Conversely, the Dow Jones Industrial Average closed lower by 0.2%. Total market volume in the Nasdaq was a whopping 24% lower than the previous day, which was already below its 50-day average level. Interestingly, it was the lightest volume day in the Nasdaq since the holiday session of December 26, 2003. Similarly, volume in the NYSE dropped by 13% and was also the lightest day of the year. Each of the major indices ended the week with solid gains, but performance was mixed for the month. The Nasdaq Composite Index showed the most relative strength and closed the month of May with a 3.5% gain, while the S&P 500 Index closed 1.2% higher during the same period. Despite last week’s 2.2% gain, the Dow Jones Industrial Average closed the month with a 0.4% loss.
Because total market volume was so light ahead of the extended holiday weekend, last Friday’s session was basically a non-event. On the daily charts, each of the major indices formed “inside days,” which means that Friday’s intraday trading ranges were completely within the respective ranges of the previous day. Upon studying all the charts of the major indices, the most important thing I noticed this weekend was the close proximity of the S&P 500 to resistance of its primary downtrend line on the daily chart. We pointed out this resistance level towards the end of last week, but it becomes even more of a factor now because the index closed last week right at this pivotal resistance point. The daily chart of the S&P 500 Index below illustrates this resistance of the primary downtrend line (the thick red line):
As you can clearly see, the downtrend line illustrated above is likely to act as resistance going into this week, just as it has done for the past two months. Whenever an index approaches trendline support or resistance that has been intact for several months, it is always wise to assume the trendline will continue to act as support or resistance until the market proves otherwise. Therefore, if you are long the market, this may be a good time to sell your positions into strength, rather than waiting for the market to drift back down. At the very least, use tight trailing stops to protect your gains and/or minimize losses in the event of trendline continuation. If the S&P sees weakness today, expect the 50-day moving average (at the 1116 area) to act as support. Remember that prior resistance becomes the new support once the resistance level is broken.
The closely-watched Semiconductor Index ($SOX) closed last week above its 200-day moving average, for the first time since April 23. However, it too is approaching resistance of its primary downtrend line, which began with the highs of January 2004. Because it is so heavily weighted with the Nasdaq Composite, the strength or weakness of the $SOX index often leads the direction of the Nasdaq. The daily chart of the Semiconductor Index below illustrates the break of the 200-day moving average, as well as overhead resistance of the primary downtrend line. The red downtrend line you see goes all the way back to January, although our chart only shows data back to April:
In addition to the S&P 500 and $SOX indexes we discussed, many other indices and sectors are showing similar patterns. Most rallied above key moving average resistance last week, but are now approaching resistance of their primary downtrend lines that began sometime earlier in the year. The break above moving average resistance, but rally into downtrend line resistance, is now generating mixed signals to many traders, which is likely to cause erratic and volatile action in the coming week. We favored the long side of the market throughout most of last week, but are now neutrally biased until we see how the major indices behave near their daily downtrend lines. If the broad market begins to head back down this week, we can declare a resumption of the overall downtrend that has been in place for several months. This would, of course, present us with new short selling opportunities in the broad market. However, a confirmed break above the daily downtrend lines would be bullish and would cause an intermediate-term rally, as the shorts would be forced to cover their positions. One of those two scenarios is likely to occur in the coming week, but it would be unwise to place aggressive bets on either side of the market until we see confirmation one way or the other. As always, we will continue to trade what we see, not what we think!
Today’s watch list:
IWM – Russell 2000 Small Cap Index Tracking Stock
Trigger = below 112.68 (below Friday’s low)
Target = 110.28 (support of the 20-day MA)
Stop = 113.85 (above Friday’s high)
Notes = The Russell 2000 Small Cap Index has rallied into resistance of both its 50-day MA and the primary downtrend line. Therefore, we expect a resumption of the downtrend and will short IWM on a break below Friday’ low. However, due to an opening gap down, remember to use the MTG Opening Gap Rules, which means we will only short on a break of the 20-minute low.
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 on Friday and over the weekend.
Edited by Deron Wagner,
MTG Founder and