Like the previous day, the broad market spent the first half of the day in a steady downtrend, but this time buyers stepped in during the last ninety minutes and caused each of the major indices to close in the green. Overall market volume, which remained very light during the morning session, increased sharply during the market’s afternoon rally. The bullish afternoon reversal enabled both the S&P 500 and Dow Jones Industrials to close 0.5% higher, while the Nasdaq Composite rallied from a 0.9% intraday loss to a 0.1% closing gain. Most importantly, volume in both the NYSE and Nasdaq came in more than 30% higher than the previous day. Because volume was formerly at its lowest levels of the year, even the 30% increase failed to push volume above average. Regardless, it was encouraging to see volume swell during the afternoon rally, as volume during the morning downtrend was roughly on par with the previous day.
In yesterday morning’s newsletter, we discussed the risks of aggressively entering new positions in a light volume environment. Curiously, yesterday afternoon’s price action proved to be a perfect example of such. If you ignored the fact that Monday’s broad-based losses coincided with the lightest overall volume of the year, you could have mistakenly assumed it was a good idea to short yesterday morning’s weakness, in anticipation of further downside momentum. But, as we explained yesterday, being heavily short when the market is dropping on very light volume is risky because it only takes a minor amount of buying pressure in order to reverse the trend, which is exactly what happened into yesterday’s close. For this reason, we did not enter any short positions during yesterday morning’s weakness and instead waited on the sidelines. Upon seeing the rally attempt at 2:30 pm EST, we noticed that volume began to correspondingly spike higher. As such, we made the decision to enter several new long positions shortly thereafter, which worked out quite well by the end of the day. We hope that you too were able to profit from the volume spike we’ve been anticipating for the past several days. Remember that volume never lies and it is always one of the most reliable leading technical indicators at your disposal.
Even at yesterday’s intraday lows, the key support levels we’ve been discussing remained intact. Specifically, both the S&P 500 and Dow Jones Industrials held well above support of their respective 20-day moving averages. The Nasdaq Composite dropped to within 3 points of its 20-day MA, but closed well above it. The afternoon rally also put both the S&P and Dow back above their 50-day moving averages, which they closed below only the previous day, but the Nasdaq is still below its 50-day MA. Because of yesterday’s bullish afternoon reversal from earlier losses, you should now mark yesterday’s lows in the major indices as the key support levels to watch. In order to remain bullish on the market, those levels need to hold. If you’re long any of the broad-based ETFs or are planning on buying today, consider placing your stops just below yesterday’s lows because any break below those lows would most likely result in a rapid decline, at least down to the indices’ 20-day moving averages. As for resistance, the highs of August 27 are the levels to watch. The daily charts of the S&P 500 below illustrates the short-term support and resistance levels:
As you may recall, the August 27 high in the S&P 500 also correlates to the prior high from July, which makes the resistance level quite important. The powerful 200-day moving average also remains only two points above that resistance level. Obviously, a rally above the prior high from July and the 200-day MA would be quite bullish, but we would not be heavily long the market until this occurs. Take a look at the Nasdaq:
The Nasdaq Composite, which has been lagging the S&P during the recent recovery, remains not only below its 200-day MA, but also below its 50-day moving average, which converges with the prior high from July. We still expect the Nasdaq to rally up to that resistance level, which is around 1,885 to 1,890. As always, continue monitoring volume in order to determine the odds that the broad market will push higher through those resistance levels.
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = above 34.06 (above yesterday’s close)
Target = 35.10 (resistance of the prior high from July)
Stop = 33.65 (below yesterday’s low)
Notes = As our commentary above explains, we expect the Nasdaq to at least rally up to its prior high from July. Remember that the position size multiplier for QQQ is “4” because it is a low volatility ETF. See the MTG Position Model for details.
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 are presently flat.
Edited by Deron Wagner,
MTG Founder and