The major indices spent the first half of yesterday quietly consolidating in a narrow range, but rallied sharply after the FOMC announced a widely expected quarter-point increase in the benchmark Federal interest rate. The broad market gave back some of the post-Fed gains during the final hour of trading, but each of the major indices still closed firmly higher. The Nasdaq maintained its recent pattern of leadership and closed 0.7% higher. The S&P 500 Index kept pace an gained 0.6%, while the Dow Jones closed 0.4% higher. Volume in the NYSE rose by 10%, which made yesterday a bullish “accumulation day” in the S&P and Dow, but volume declined by 2% in the Nasdaq. The Semiconductor Index ($SOX), which we have been closely following for the past week, closed another 0.8% higher. Since the $SOX closed just below the previous day’s high, it indicates the sector is consolidating nicely on the hourly chart and should continue to move higher in the short-term.
Looking at the longer-term weekly charts, you will notice that the S&P 500 Index has rallied into resistance of its primary downtrend line, which has began with the high of March 2004. During its last rally attempt in June, the S&P formed the second anchor point of the current downtrend line and eventually sold off to form new lows. The weekly chart of the S&P 500 below illustrates the current resistance of this key downtrend line:
Because the downtrend on the S&P has been intact for six months, we must assume the downtrend will continue unless the market proves otherwise. On the daily chart, the S&P has been consolidating near the highs of 1130 for the past week. This is bullish, so we do not yet recommend selling short the S&P until we get some confirmation the downtrend will resume its trend of the past six months. However, we do recommend you use tight stops on any current long positions that are not in a technology-related sector. We will be looking for signs of weakness in order to short SPY (S&P 500 Index) on a resumption of the weekly downtrend. Obviously, a rally above the downtrend line, especially if it occurs on high volume, means that all bets are off on the short side of the market. In a summary, the S&P is at a “make or break” point on the weekly chart.
As we pointed out in the beginning of September, the Dow Jones Industrial Average has already rallied into its corresponding downtrend line and has been exhibiting weakness ever since. Notice how the weekly downtrend line has been acting as resistance ever since the Dow rallied into it nearly three weeks ago:
The reason we continue to be bullish on the short-term direction of the Nasdaq, regardless of the weakness in the Dow, is because the Nasdaq remains well below resistance of its weekly downtrend line, which currently is near the 2,000 level. We feel the Nasdaq will at least make a valiant attempt at testing resistance of its downtrend line before the broad market would resume its prior downward trend. Notice how the Nasdaq is still 80 points below its downtrend line, although resistance of the 200-day MA (not illustrated) is at the 1,966 area:
As we enter today, continue to be aware of the sector rotation that is taking place as money is flowing out of the Dow/S&P type sectors and into the tech-related sectors. Increase your odds of success by trading in the same direction of the institutional money flow, which is a concept we will be discussing at our FREE upcoming seminar in Chicago.
Today’s watch list:
We remain long half position of SMH and are poised to enter new short positions in the S&P. However, patience is key right now, as we need to be sure the S&P resumes the weekly downtrend line, as discussed above. Market is at pivotal point, so caution is in order until we see confirmation one way or the other.
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 (half position only) –
bought 30.13 (avg.), sold 32.16, points = + 2.03, net P/L = + $301
SMH long (half position remaining from Sept. 10 and 17 entries) –
bought 30.13 (avg.), new stop 30.90, target 32.95, unrealized points = + 1.54, unrealized P/L = + $231
Per intraday e-mail alert, we sold HALF of the SMH position into strength yesterday morning, in order to lock in gains on partial share size. However, we remain long half position of SMH with a new stop, as per above.
Edited by Deron Wagner,
MTG Founder and