Commentary:

The broad market digested Monday’s gains nicely, as the S&P 500, Dow Jones Industrials, and the Nasdaq each closed higher, but on lower volume. As we often see on the day following a “trend day,” the major indices spent most of the day consolidating in a narrow range, near the highs of the previous day’s range. Both the S&P and Nasdaq initially formed a double top at their respective highs of the previous day, but buyers stepped in during the final 30 minutes of trading and pushed both indices to close at their intraday highs. The Dow Jones Industrial Average showed the most relative strength and closed with a 0.4% gain yesterday, while the S&P 500 Index and Nasdaq Composite Index closed 0.2% and 0.1% higher respectively. Volume dropped 3% in the NYSE and 1% in the Nasdaq, which is typical on consolidation days. Nevertheless, we have yet to see any accumulation days on above average volume, which indicates institutions continue to largely stand on the sidelines.

For those of you who trade the broad-based ETFs such as SPY, DIA, or QQQ, one indicator we have found that works well on consolidation days is the 20 period moving average on the 15 minute chart. When the major indices are rallying sharply, as they did on Monday, this 20-MA will be trailing well below the price. But, on the following day, you will often find the 20-MA on the 15 minute chart to be a great support or resistance level that usually pushes the market higher. Below is a 15 minute chart of SPY (S&P 500 Index) that illustrates how well the 20-MA acted as support yesterday. When SPY broke below its 20-MA in the afternoon, the 40-MA provided perfect support as well. Take a look:

As you can see, following the 20 and 40-MAs on the 15 minute chart can be helpful in providing you with ideal stop placement, as well as new order entries. Interestingly, QQQ (Nasdaq 100 Index) found support exactly at its 20 and 40-MAs yesterday as well:

While we place the most emphasis on daily charts, it is important to follow multiple time frames when doing your analysis. The more numerous time frames that confirm a trend, the more likely a trade is to work in your favor. But, when the charts do not confirm each other, it is probably better to pass the trade by. In such cases, realize that the longer the time frame, the more weighting it will have on the stock’s direction. For example, if a stock or ETF has support on its hourly (60-minute) chart, but has resistance on its daily chart, we probably would not buy the stock UNLESS we were only going to daytrade it short-term. However, if the weekly and daily charts look good, but the 15 minute chart does not, we would be more inclined to take the trade, realizing that the longer-time frame will usually prevail.

In case you’re curious, we simultaneously monitor the following chart time frames: 15-minute, 60-minute, daily, and weekly. Within these charts, we use the following moving averages: 20, 40, and 200 MA (on the 15 and 60 minute charts), 20, 50 and 200 MA (on daily charts), 10, 40, and 200 MA (on weekly charts). There are obviously many different time frames you can use, as well as multiple types of moving averages. The key is not which one you use, but that you become comfortable with interpreting the signals of your own analysis every day.

Note that the U.S. equities markets will be closed on Friday, June 11, in honor of President Reagan’s passing.

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Today’s watch list:

(There are no new plays for today, though we are now short BBH for swing, which we entered yesterday.)

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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.

Closed Positions:

DIA short (from June 7) –
shorted 103.57, covered 104.02 (avg.), points = (0.45), net P/L = ($93)

Open Positions:

BBH short (from June 8) –
shorted 145.42, stop 147.80, target 138.70, unrealized points = (0.08), unrealized P/L = ($8)

Notes:

Per intraday e-mail alert, we incrementally scaled out of our DIA short with a small loss. We also entered BBH short for swing trade.

Edited by Deron Wagner,
MTG Founder and
President