Commentary:
The major indices each closed moderately lower yesterday, as resistance of the 50-day moving average remained a factor on the Nasdaq Composite. The S&P 500 and Dow Jones lost 0.5% and 0.3% respectively, while the Nasdaq dropped 0.4%. The trading range was choppy and narrow, which is never ideal for intraday traders of the broad market. Each of the major indices also had an “inside day,” which means that their intraday highs and lows were enclosed completely within the previous day’s range. This type of action usually leads to a sharp move the next day, but the direction remains to be seen because the market is giving us some mixed signals. Volume increased by 3% in the NYSE and 10% in the Nasdaq, which made yesterday another bearish “distribution day,” the second one this week in the Nasdaq. Nevertheless, volume continued its pattern of coming in below its 50-day average level.
For the past several days, the broad market has remained in a choppy, relatively narrow range. As such, the support and resistance levels we have been discussing this week have not changed. On the S&P and Dow, short-term support should be found at the 200-day MA, while resistance is the highs of this week. On the Nasdaq, resistance clearly remains at the convergence of the August 2 high and the 50-day moving average, which is around the 1,871 – 1,875 area. Rather than looking at the same daily charts we’ve been discussing for the past week, let’s shift our attention to the longer time frame of weekly charts.
While daily charts are ideal for showing short-term trends, the weekly charts hold more bearing on the primary, intermediate-term trend of the markets. Obviously, the longer the chart’s time frame, the more important the support and resistance levels will be. For example, the trend on a 15 minute chart holds more bearing than the trend on a 5 minute chart, just as the weekly chart is more important than the daily chart when it comes to how much support or resistance an index will provide.
Upon analyzing the weekly charts, we noticed that the Dow Jones Industrial Average has rallied up to resistance of its primary downtrend line, which has been intact since February 2004. We have drawn the downtrend line on the weekly chart of the Dow below. We removed the moving averages so you can more easily focus on the downtrend line:
Although the Dow has closed above its 200-day moving average for the past several days, the resistance of the downtrend line from the Feb. 2004 high is more significant. As such, you may consider closing any Dow-type long positions and/or initiating new short positions on the Dow. Today’s trade setup is DIA short, which we feel provides a good risk/reward due to the downtrend line above. If the Dow closes above this week’s high and therefore violates the downtrend line, we will simply close the position for a small loss. But, if the downtrend remains intact, as it has for the past 7 months, we will be short at a high price rather than chasing it lower. When a trendline has been intact for such a long period of time, it is foolish to not assume the trendline will remain intact UNLESS the market proves otherwise. Remember that we’re not in the game of predicting what the market will do, as we simply react to what the market gives us each day. As long as you combine solid money management principles with reacting to what the market tells you, it is never necessary to guess when a trendline will be broken.
Similar to the Dow Jones, the S&P 500 Index also has overhead resistance of its primary downtrend line, which formed with the high of March 2004. However, unlike the Dow, it has not yet rallied up to meet its trendline resistance, which is currently in the vicinity of 1,132. The weekly chart of the S&P below illustrates the resistance of the weekly downtrend line:
The Nasdaq Composite, which has lagged the recent bounce in both the S&P and Dow, is still 150 points below resistance of its weekly downtrend line, currently at the 2,000 area. Take a look:
Because of the divergence between the Dow and the Nasdaq above, two intermediate-term trades to consider are being short the Dow (DIA) or long the Nasdaq (QQQ or ONEQ). More than likely, either the Dow will drop hard due to its downtrend line resistance, or the Nasdaq will start to play “catch up” and rally up to its weekly downtrend line. Astute traders may even consider taking positions on both sides and simply closing the trade that goes in the wrong direction. It feels like we will see a big move going into the fourth quarter of the year, but there are too many mixed signals to have a clear idea of which direction. Shorting DIA while buying QQQ is a good way to hedge your risk and profit from a decent move based on the weekly charts. Just remember these are WEEKLY charts, not daily charts. Therefore, it could easily take several weeks to months in order for either of these trade ideas to reap profits. Just something to consider if you are short on ETF trade ideas right now.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrials Tracking Stock)
Short
Trigger = below 103.03 (below the low of past two days)
Target = 100.95 (50% Fibo retracement of recent rally)
Stop = 104.08 (above this week’s high)
Notes = See commentary above regarding reason for short entry in the Dow.
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 now flat the ETFs.
Edited by Deron Wagner,
MTG Founder and
President