Commentary:

The major indices continued their patterns of divergence yesterday, as the S&P 500 closed flat, but strength in the semis enabled the Nasdaq Composite to gain 0.5%. The Dow Jones Industrial Average once again demonstrated the most relative weakness and closed 0.1% lower. Although the S&P closed unchanged, the broad market’s intraday action was quite indecisive and resembled a roller coaster ride. Both the S&P 500 and Dow Jones Industrials spent the first half of the day in a downtrend, trading at new two-month lows, but reversed and rallied up to the flat line shortly after noon. The early afternoon again showed weakness, and it initially appeared as if both indices were going to head back down to their lows, but buyers stepped in during the final ninety minutes and lifted the indices back to flat. The Nasdaq Composite followed a similar intraday pattern, but the drop was not as severe and the index closed with a gain rather than flat. This was due to continued sector rotation into the tech sectors, which we pointed out a few days ago.

Volume in both the NYSE and Nasdaq came in 3% lighter than the previous day. Because the Nasdaq closed in positive territory, it would have been more bullish to see an increase in volume, but the bearish price to volume relationship in the broad market continued. Of the three sessions this week, there were two “up” days in the Nasdaq, both on lighter volume, and one “down” day that occurred on heavier volume. Three weeks ago, every “up” day was occurring on higher volume, while the few “down” days were on lighter volume. Until this new pattern changes and we begin to see higher volume on the “up” days, we remain with a mostly neutral bias in the broad market.

Since the S&P and Dow both closed nearly flat, the same support and resistance levels we discussed yesterday are in effect going into today’s session. The afternoon reversal in the broad market was bullish because it pulled both the Dow and S&P back above new 2-month lows, but we question the legitimacy of the move considering the bearish price to volume patterns that have persisted during the past week and a half. The Nasdaq Composite again held support of its primary uptrend line, but still has overhead resistance from both its October 13 and October 19 highs. There’s no question that it is challenging to determine, at least with any degree of confidence, which side of the market to be on right now. Therefore, we continue to maintain a mostly cash position so that we can be prepared to take action whenever the broad market breaks out of its current range. We expect the market to find some resolution after earnings season has passed, so a bit of patience may be required.

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Today’s watch list:

There are no new plays for today, although we remain short both HHH and SPY (which triggered yesterday).

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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:

HHH short (re-entry, from Oct. 19) –
shorted 60.20, new stop 61.15, target 57.15, unrealized points = + 0.51, unrealized P/L = + $102

SPY short (from Oct. 20) –
shorted 110.31, stop 111.25, target 108.50, unrealized points = (0.16), unrealized P/L = ($32)

Notes:

Note the new, tighter stop on HHH.

Edited by Deron Wagner,
MTG Founder and
President