After two days of sideways consolidation, the major indices once again broke out and rallied to close at their highest levels since the current rally began on August 13. Like the previous two days, yesterday morning began rather slowly and in a narrow range, but buyers stepped in at 12 noon EST and caused the broad market to trend higher throughout the afternoon. The S&P 500 and Dow Jones Industrial Average both closed the day with 0.8% gains, while the Nasdaq Composite notched a 1.3% increase, its eighth gain of the past ten days. Volume in the NYSE increased by 9% over the previous day, but, not surprisingly, once again came in below its 50-day average. Volume in the Nasdaq was a mere 1% higher.
Because the S&P 500 rallied to a new high of the week, it pushed through the first resistance level we discussed in yesterday’s newsletter, just over the 1,100 level. The index, however, stopped dead in its tracks upon testing the second resistance level we spoke of, which was the 50-day moving average at the 1,105 area. As you may recall, the 50-day moving average also converged with resistance the prior highs from July. This means the S&P may have some difficulty going much higher from here, especially given the light volume levels of late. Even if the index manages to push through its 50-day MA, there is a much more important and difficult resistance of the 200-day MA, just five points higher. The daily chart of the S&P 500 below illustrates upcoming resistance of the 50-day MA, the prior high from July, and the 200-day MA:
Needless to say, being long an ETF like SPY (S&P 500) right now warrants a great degree of caution because of the amount of resistance the index will need to contend with. Tight stops are in order for long positions, and you may want to sit on the sidelines, rather than chase stocks higher, if you are not already long. Similarly, the Dow Jones Industrial Average also closed at resistance of its prior high from July (10,200), although that index managed to closed above its 50-day MA. You may find that you have better odds with long positions in the Nasdaq because that index is still well below both its prior high and its 50-day MA. Furthermore, the SOX (Semiconductor) index is beginning to show strength, which should push the Nasdaq higher.
After a short-lived, two-day correction, the Gold and Silver Mining Index ($XAU) rebounded sharply with a 2.7% gain yesterday. Last week’s breakout in the index remains intact, as the index closed back above the prior downtrend line after probing below it for two days. Because the index rallied for seven consecutive days, it was not surprising to see two days of retracement on Monday and Tuesday. Hopefully you took our advice and used that pullback as a chance to position yourself in the gold/silver mining stocks because they all look very strong after last week’s breakout. FYI, the Morpheus Capital fund remains long NEM, AU, and CDE.
Although the broad market continues to march higher, we cannot stress enough the importance of being suspicious of low volume rallies. When an index rallies on lighter than average volume, it only takes one wave of higher volume selling (aka “distribution”) to undo the gains. Conversely, an index that is rallying on higher than average volume will typically be able to hold up against selling programs. As long as the short-term trend remains “up,” it makes sense to position yourself mostly on the long side of the market. But, as we have said before, remain vigilant and ready to switch to the short side at a moment’s notice. If the market was rallying on decent volume, we would be more optimistic, but that simply is not the case right now. Remember the MTG mantra, Trade what you see, not what you think!
Today’s watch list:
There are no new trades for today, although we remain long SMH from yesterday’s entry.
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. 25) –
bought 30.16, stop 29.49, unrealized points = + 0.05, unrealized P/L = + $15
We are once again long SMH, which triggered per yesterday’s newsletter.
Edited by Deron Wagner,
MTG Founder and