Although the broad market began the day with a moderate opening gap down, buyers quickly stepped in and reversed the initial weakness. Within the first hour of trading, both the S&P 500 and Nasdaq Composite were not only in positive territory, but both indices had also rallied above their respective highs of the previous day. The upside momentum of the morning reversal enabled the broad market to settle into a smooth and steady uptrend that lasted the entire day. Each of the major indices also closed at their intraday highs, something we have not seen in quite a while. Strength in the Semis and Biotechs enabled the Nasdaq Composite to close with an impressive 2.0% gain, while the S&P 500 and Dow Jones Industrial Average each closed approximately 1.2% higher. Yesterday’s volume in the NYSE was 1% higher than the previous day, while volume in the Nasdaq came in 13% higher.
Both the S&P 500 and Nasdaq Composite closed higher in each of the past four sessions. In the NYSE, three of the past four “up” days have occurred on higher volume, while yesterday was also the second consecutive “accumulation day” for the Nasdaq. It’s a positive sign that the recent gains have been occurring on increasing volume, but yesterday’s volume in both the NYSE and Nasdaq was still about 4% below their 50-day average levels. This begs the question of, “Where is the institutional money?” The lower than average volume levels could simply be attributed to the typical light action of the summertime, but it still causes us to proceed cautiously. History has shown us that most substantial bear market reversals have occurred on volume levels that are well above average.
The biggest reason the broad market closed so strong yesterday was that each of the major indices rallied firmly above their respective daily downtrend lines that we have been discussing for nearly two weeks. Hopefully you paid attention to yesterday’s analysis of the major indices because it would have caused you to buy the market yesterday afternoon after you realized the downtrend lines were broken. But, because the S&P, Dow, and Nasdaq have only closed above their downtrend lines for one day so far, we cannot yet “officially” declare that the six-week downtrend has been broken. Nevertheless, sustained trading action above the downtrend lines for the next several days will confirm the break of the primary downtrend. Below are daily charts of the three major indices that illustrate how each index rallied and closed above its respective downtrend line:
On the S&P 500 chart above, notice the convergence of the 50 and 200-day moving average, right around the 1108 level. Notice also that the 1108 level coincides with the prior high from August 2. As such, expect the 1108 area to act as the next major area of price resistance the index will encounter. Support should be found at the prior downtrend line, which is around the 1087 area. Next, take a look at the Nasdaq:
The Nasdaq Composite is still well below resistance of both its 50 and 200-day moving averages, but its next major resistance will be the prior high from August 2, which is around 1893. Support for the Nasdaq is at the prior downtrend line, which is around 1810. Finally, the Dow Jones. . .
Just like the S&P and Nasdaq, the Dow Jones also closed above its prior downtrend line. Next major area of resistance on the Dow will be found at its prior high, around the 10180 to 10200 range. This also coincides with resistance of the 50-day moving average, which is currently at 10182. Look for support to be found around 10040, the prior downtrend line.
Obviously, a break above the downtrend lines means we should now shift into a slightly more bullish stance, at least in the short-term. But remember that volume still has yet to indicate the footprints of institutional interest, which is always necessary in order for rallies to be sustained. Going into today, the broad market is likely to take a break and trade sideways in a narrow range. This is common on the day following a sharp rally, as it is enables the major indices to digest their gains of the previous day. Therefore, you may want to use any retracement or pullback as an opportunity to position yourself on the long side, if you have not already done so. We are already positioned long in both PPH and SMH and have solid unrealized gains in both ETFs, but you may also want to test the waters with the broad-based ETFs such as QQQ or SPY as well.
Today’s watch list:
There are no new plays, but we remain long both PPH and SMH, both with solid gains.
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.
SMH long (from Aug. 16) –
bought 29.10, new stop 29.60, target 31.30, unrealized points = + 1.26, unrealized P/L = + $378
PPH long (from Aug. 11) –
bought 72.70, new stop 10 cents below the 20-minute low, target 74.65 (achieved), unrealized points = + 1.97, unrealized P/L = + $197
We remain long both SMH and PPH, both with solid, unrealized gains. PPH hit our initial price target during the last few minutes of trading yesterday, so we are now switching to a stop that is 10 cents below the low of the first 20 minutes of today’s trading. If that stop is not hit, we will remain long throughout today, otherwise we lock in the profits. We also raised the stop on SMH, as noted above.
Edited by Deron Wagner,
MTG Founder and