After beginning the day with an opening gap down, the broad market spent most of the day in an intraday downtrend, which was not surprising given the solid gains of the previous week. But, upon testing support of their 50-day moving averages, buyers stepped into the S&P and Nasdaq during the final 90 minutes and completely reversed the intraday losses. At its lowest point of the session, the S&P 500 Index was down 0.7%, but the late afternoon rally erased the losses and enabled the index to close flat. The Nasdaq Composite Index and Dow Jones Industrial Average both recovered in a similar fashion and closed with gains of 0.2% and 0.1% respectively.
Total market volume increased by 12% in the NYSE and 17% in the Nasdaq, which was bullish considering the indices closed slightly positive. Unfortunately, the volume increase was not very impressive considering that the previous day saw the lightest volume of the year. Even with yesterday’s increases, volume in both the NYSE and Nasdaq was still approximately 17% below their 50-day average levels. It was positive, however, that volume during the late afternoon rally was proportionately higher than it was during the weakness in the first half of the day. Volume breadth also reversed and closed with advancing volume slightly outpacing declining volume in both the NYSE and Nasdaq. Overall, it would have been better to see a larger volume spike, but it was still an “accumulation day” regardless, which was a welcome change from the numerous “distribution days” we have seen over the past two months.
During yesterday morning’s weakness, both the S&P 500 and Nasdaq Composite indexes tested support of their 50-day moving averages, but the late afternoon rally enabled both indices to close well above it:
Conversely, the Dow Jones remains below its 50-day MA, but still closed near its high yesterday. The fact that these two major indices bounced firmly off support of their 50-day moving averages is bullish and sets the tone for a probable upside breakout attempt above last week’s highs. However, as we illustrated in yesterday’s newsletter, the S&P 500 Index has rallied to the upper channel of its primary downtrend line. This means the next few days will present a “make or break” situation for the S&P 500. The index is either going to roll over and resume its downtrend that has been in place for several months OR it will break sharply higher, above resistance of its downtrend line. We cannot know for sure which of these scenarios will occur, but yesterday’s bullish action into the close causes me to believe the latter will occur. Below is an hourly chart of the S&P 500 Index that illustrates the clear resistance level that represents the upper channel of the daily downtrend line:
As you can see, 1123 to 1124 is the key resistance area to watch going into today. If the S&P rallies and holds above that level after the first hour of trading, odds are good we will see a trend day higher due to the break of the daily downtrend line. If this occurs, you may want to consider buying SPY (S&P 500 Index) or other broad-based ETFs. Short-term support would obviously be found all the way down to yesterday’s low.
Like the S&P, the Nasdaq Composite has similar horizontal price resistance, at the 1991 level:
In addition to yesterday’s intraday recovery in the Nasdaq, the afternoon reversal in the Semiconductor Index ($SOX) enabled the index to close above its 200-day moving average for the second consecutive day, although it traded below it on an intraday basis.
Overall, many of the major indices and key sectors are now beginning to show some resilience for the first time in months. While this certainly does not mean we will rally up to the prior highs of the year, odds are good that the broad market will hold its ground, at least in the short-term. We’ll know better based on whether or not the S&P 500 can break and hold above resistance of its primary downtrend line. Stay tuned. . .
Today’s watch list:
There are no new plays for today, although we may buy the broad-based ETFs if the S&P breaks and holds above the 1124 area. As always, we will send an e-mail alert when/if we enter any new ETF positions.
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.
SPY short (from June 1) –
shorted 112.30, covered 112.27 (avg.), points = + 0.03, net P/L = $0
Per intraday e-mail alert, we cancelled the IWM short setup, but entered SPY short. We used a tight trailing stop on SPY because we anticipated a possible afternoon rally, which is exactly what occurred. While we did not profit from the SPY short, our strategy of trailing stops enabled us to incrementally scale out of the position near breakeven from our entry point. We are now flat once again.
Edited by Deron Wagner,
MTG Founder and