After beginning the day with an opening gap down on Friday morning, the major indices rallied sharply during the first hour of trading, but spent the remainder of the day trending lower. The S&P 500 Index netted a gain of 0.3% for the day, but closed in the middle of its intraday range. The Dow Jones Industrial Average traded in a similar fashion and closed 0.4% higher. The Nasdaq Composite Index, which closed only 0.2% higher, once again diverged from the S&P and Dow and closed in the bottom third of its intraday range. Friday’s session once again saw strength in the “old economy” sectors such as Utilities, Tobacco, and Gold/Silver Mining, but weakness in the tech-related sectors such as Semiconductors, Computer Hardware, and Software (with the exception of Microsoft). Total market volume was 16% higher in the NYSE and 18% higher in the Nasdaq, which was likely the result of with Friday being a “quadruple witching” options expiration day.
For the first time in three weeks, total market volume in both the NYSE and Nasdaq came within a fraction of the 50-day average levels, although volume in both indices still closed below. Friday’s volume in the NYSE was the heaviest since May 27 and the heaviest since May 25 in the Nasdaq. But, Friday’s volume increase can most likely be attributed to the fact that it was a “quadruple witching” options expiration day, which typically is associated with a surge in trading volume. Although we would like to believe otherwise, the reality is that we probably will not see much of an increase in volume until at least the end of the month. It is our opinion that many institutions are holding off on aggressively entering the markets until two key events take place later this month: the “handover deadline” for Iraq and the FOMC meeting on June 30. Fear of increased terrorist activity and the speculation of higher interest rates are the two primary factors that are keeping institutions on the sidelines, and with good reason. As we approach June 30, expect volume to drop even more. Lower than usual volume levels usually causes choppy market conditions, so continue to use extreme caution with entering new positions, at least until the end of the month.
In addition to light volume, another reason for the chop and indecisive nature of the broad market is due to the divergence between the S&P/Dow and the Nasdaq. Specifically, we are referring to the fact that the S&P and Dow are both sitting above resistance of their former downtrend lines that were formed earlier in the year, but the Nasdaq is still below resistance of its primary downtrend line. Below are daily charts of both the S&P 500 Index and the Nasdaq Composite Index that illustrate this divergence:
As the first chart above illustrates, the Nasdaq Composite Index remains below the upper channel resistance of the downtrend that began with the high of January 2004. The index briefly rallied above this trendline resistance on June 7 and 8, but promptly fell back below it. However, the index has continued to find support above the convergence of its 20, 50, and 200-day moving averages, which it closed above on Friday. So, keep a close eye on the Nasdaq because it is likely to either break sharply above this downtrend line OR fall below its moving averages and sell off further. Conversely, the S&P 500 Index, as illustrated on the second chart above, continues to hold above its prior downtrend line AND is well above its moving averages. Therefore, odds probably favor being long the S&P and Dow-related sectors and stocks more than the Nasdaq. Of course, it will be time to buy the Nasdaq IF, and only IF, the index rallies and holds above its downtrend line. Because it is so heavily weighted within the Nasdaq, continue to watch the performance of the Semiconductor (SOX) Index, as it will probably dictate the direction of the Nasdaq. The $SOX has been lagging the market for weeks, but a sudden reversal in that sector could cause some bullish action in the broad market.
Today’s watch list:
BBH – Biotech HOLDR
Trigger = below 139.90
(below the 4-day low)
Target = 133.40 (Fibonacci support)
Stop = 142.30 (above last week’s high)
Notes = We netted a 6-point profit on the first break of trendline support in BBH, but now it has rallied into resistance and we believe it will roll over again. So, we’re ready to short a break of horizontal price support at 140 area.
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