Commentary:

The major indices staged a broad-based rally on higher volume yesterday, after the Feds followed through on a largely anticipated quarter point increase on interest rates. Like the previous day, the broad market spent the first several hours in a very tight, sideways range, but was grinding higher throughout the morning session. Immediately following the FOMC announcement on interest rates at 2:15 pm EST, the major indices initially sold off as a knee-jerk reaction, but reversed during the final hour of trading and each closed at their intraday highs. The Nasdaq Composite turned in an impressive 1.9% gain yesterday on volume that was 17% higher than the previous day. Both the S&P 500 and Dow Jones Industrials closed 1.3% higher on a 14% increase in volume. Because the major indices each closed higher and on higher volume, yesterday was technically a bullish “accumulation day,” but remember that volume the previous day was very light to begin with. Despite yesterday’s increase over the previous day, volume in both the NYSE and Nasdaq still came in below its 50-day average levels.

Yesterday’s gains in the broad market roughly erased last Friday’s losses in each of the major indices, but the big question on everyone’s collective mind will be whether or not the market is able to follow through to the upside. Since the highs of June 30, every rally attempt has been very short-lived, marked by lighter volume, and generally unimpressive. However, there are a few key resistance levels you can watch that will give you a decent idea of how much momentum may be behind yesterday afternoon’s rally. First, take a look at the daily chart of the S&P 500 Index:

As you can see from the chart above, the 1079 – 1080 range is a key resistance level the S&P 500 will need to contend with in order to follow through on yesterday’s gains. This area of resistance is key because it represents a prior support level that failed to hold and therefore trapped many of the bulls who formerly anticipated a double bottom to form. Any rally attempt above this level is likely to be met with overhead supply from those bulls who will be selling in an attempt to “simply break even.” This is the psychological reason why prior support levels become the new resistance levels once the area of support is broken. So, a closing price above the 1080 area within the next two days would be rather bullish, especially if it is backed by higher than average volume. However, we would be very careful on the long side of the market until the S&P proves it can close above this area of resistance, which correlates to yesterday’s closing high. Similar resistance levels can be found on both the Nasdaq Composite and Dow Jones Industrials, each of which rallied up to resistance of their prior lows yesterday. Take a look at the Nasdaq Composite:

The Nasdaq Composite will first find resistance at yesterday’s high, due to the gap that was formed from the gap down on August 6. However, if the Nasdaq is able to rally “into the gap,” the next major area of resistance will be found around the 1820 – 1827 area, which correlates to resistance from the low of August 5, as well as the prior low from July 26. Finally, here is the Dow:

On the Dow, expect the 9955 area, just above yesterday’s close, to act as resistance.

Cisco (CSCO) reported earnings after the close yesterday. Although they met earnings expectations, the stock was trading quite a bit lower in the after-hours session, as was the Nasdaq futures. As of the time of this writing, both the S&P and Nasdaq futures are trading much lower in the pre-market session, so it will be interesting to see whether or not we see a quick recovery and filling of the gap, or whether the broad market continues to meander in a range. Either way, stay nimble and don’t fall in love with either side of the market.

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Today’s watch list:

PPH – Pharmaceutical HOLDR
Long

Trigger = above 72.65 (above yesterday’s high)
Target = 74.65 (resistance of prior high from Aug. 3)
Stop = 71.65 (below yesterday’s low)

Notes = Just looking to play a bounce in the Pharmaceuticals, which began showing a lot of relative strength yesterday afternoon. Note that $IPH is the index which tracks PPH and can give you a more accurate idea of the fair value of PPH, which often has a wide spread.

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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:

(none)

Open Positions:

(none)

Notes:

We are presently flat the ETFs.

Edited by Deron Wagner,
MTG Founder and
President