Last Friday’s session was quiet ahead of the three-day weekend, as the major indices consolidated and closed at their lows of the previous day’s range. The S&P 500 Index closed 0.3% lower, the Nasdaq Composite Index lost 0.4%, and the Dow Jones Industrial Average shed 0.5%. However, volume in the NYSE came in 28% lighter than the previous day, and was the lightest volume day of the year! Volume in the Nasdaq declined by a whopping 31%, and only one day this year was lighter than last Friday. On May 28, ahead of the three-day Memorial Day weekend, volume in the Nasdaq was marginally lighter than last Friday. With volume being so light, it’s difficult to place any significant relevance on last Friday’s price action because institutional participation was so minimal. Most likely, the price action of the next several days will show the real direction we are headed in the short-term. For the week, the S&P 500 Index lost 0.8%, while the Nasdaq Composite dropped 0.9%. As such, we enter the new week in correction mode.
Prior to last Thursday, the major indices were beginning to break higher, out of a multi-week, sideways trading range. However, a broad-based selloff that began on Thursday and followed through on Friday caused many breakouts to fail. Going into this week, the major indices are sitting at the lower end of their trading ranges, but most should find support above the upper channel of their downtrend lines that were broken earlier last month. Let’s take a look at the longer-term weekly charts of the S&P, Nasdaq, and Dow Jones in order to have an accurate “big picture” of where the broad market is headed. We’ll begin by taking a look at the S&P 500 Index, the broadest of the major indices:
Looking at the chart above, notice that the S&P 500 rallied above its multi-month downtrend line (the red line) four weeks ago, on the week ending June 11. Since that time, the index has traded sideways, within a 24-point range. Resistance of this trading range can be clearly seen at the 1,146 area, which correlates with the prior high from the week ending April 30. Several attempts to rally above the 1,146 level in late June were met with immediate overhead supply that caused the index to remain within the range. The positive, however, is that support remains intact at the 1,122 level, which correlates to the low of the past four weeks. Furthermore, the prior downtrend line now converges on the 1,119 area and should act as support. Remember that a prior resistance level becomes the new support, after the resistance is broken. Although not shown in the weekly chart, support of the 50-day moving average is also at the 1,119 area. Therefore, it seems pretty clear that the 1,119 to 1,122 area is a key support level to watch in the upcoming week, while the 1,146 area remains as resistance. A confirmed break below the 1,119 area would be shortable, while a confirmed rally above 1,146 is buyable. But, until either of those scenarios occur, your best odds lie in buying each pullback to support, but selling into the resistance. We must assume the sideways trading range will continue until the market proves otherwise. Next, take a look at a weekly chart of the Nasdaq Composite Index:
On the week ending June 25, the Nasdaq closed above a downtrend line that had been in place for six months. Last week saw a correction, but the index held above its prior downtrend line, which should now act as support around the 1,985 level. Also, support of the 200-day moving average (not illustrated) is at the 1,979 level. Therefore, keep a close eye on the 1,979 to 1,985 going into this week, as that range should provide buyable price support on the Nasdaq. Resistance will be found at the 2,015 to 2,055 range. The prior high from the week ending April 30 is major resistance at the 2,059 area. Notice how the prior high from that same week also acted as resistance on the S&P 500, at the 1,146 area. Finally, here is a weekly chart of the Dow Jones Industrial Average:
Like the S&P and Nasdaq, the Dow also closed last week above support of its prior downtrend line, but the downtrend line is now right below last week’s closing price. If the Dow sees just another day of selling, it will be in danger of closing back below its downtrend line, which would be quite bearish. However, support of the 10 and 40-week moving averages, illustrated on the chart above, should act as secondary support in the event of a break below the downtrend line. The Dow has been lagging behind both the S&P and Nasdaq over the past week, so this is probably the best index to short in the event of continued broad market weakness. Conversely, the Nasdaq would be the first index I would buy if the market rallies off its support levels here.
This week begins quarterly earnings season, so be aware that many sectors will make erratic moves based on earnings results of the major companies within each industry sector. On tap this week is earnings from the following closely-watched companies: Yahoo!, Genentech, and General Electric. Next week, however, is when earnings season really kicks into gear. This is probably not the time to be aggressive on either side of the market, but we feel you can remain a cautious bull, just as long as the major indices hold above support of their prior downtrend lines. We recommend you write down the key support levels discussed in today’s newsletter and set your stops on any ETF long positions based on a break below those levels.
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = 5 cents above the high of first 20 minutes
Target = 37.95 (retest of prior high)
Stop = 36.45 (below support of daily uptrend line)
Notes = We feel there is a good chance that QQQ will find support based on its uptrend line illustrated on the chart above. However, we will only buy QQQ if it rallies above the high of its first 20 minutes of trading. Otherwise, it is likely to trade sideways to lower all day.
BBH – Biotech HOLDR
Trigger = below 143.85 (below Friday’s low)
Target = 139.20 (support of the 200-day MA)
Stop = 145.50 (above Friday’s closing price)
Notes = Looking to short a reversal of BBH due to rally into downtrend line resistance.
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 all cash over the weekend.
Edited by Deron Wagner,
MTG Founder and