The recent pattern of sharp divergence between the blue chips and the tech sectors continued yesterday, as the Nasdaq once again moved higher while the Dow Jones Industrials closed lower. Strength in the Internet, Semiconductor, and Software sectors enabled the Nasdaq to gain 1.1% yesterday, but more relative weakness in the “old economy” sectors limited the gain in the S&P 500 to only 0.3%. The Dow Jones Industrial Average fared worse and actually closed with a 0.2% loss. Despite the Nasdaq’s gain, intraday trading action was extremely indecisive and it was far from a smoothly uptrending day, especially in the S&P. Earnings season has really caused the broad market to become quite choppy during the past week, which makes it challenging for short-term traders to position themselves on the right side of the market. To illustrate the broad market’s indecision, take a look at the 5-minute intraday chart of SPY (S&P 500 Index Tracking Stock) on the chart below:
On the chart above, notice how the S&P first sold off in the early morning, rallied to a new high later in the morning, completely reversed and sold off to a new intraday low at mid-day, then rallied again in the afternoon. The afternoon rally ran into resistance of its morning high (circled in blue), which prevented the index from breaking out of the range. Needless to say, the type of trading action you see above is not much fun if you’re attempting to swing trade the broad-based ETFs such as SPY or DIA (Dow Jones Industrial Avg. Index Tracking Stock). However, because the Nasdaq has been showing so much relative strength to both the S&P and Dow, notice how much better QQQ (Nasdaq 100 Index Tracking Stock) acted yesterday:
QQQ chopped around in a range for the first half of the day, but powered to a new high in the afternoon. During that same time, however, remember that both the S&P and Dow failed to rally past their morning highs. This is why we say the Nasdaq has been showing relative strength, while the Dow and S&P are showing relative weakness. Sectors such as Utilities, Oil, and Banking, each of which led the broad market rally of the prior month, have passed the baton to the tech-related sectors; hence the sudden strength in the Nasdaq. Remember that institutions are always looking for a place to park their money, so they frequently rotate out of one sector and into another. Your job as a trader is to determine which sectors are seeing money outflows and which are seeing inflows so that you can profit by trading in the same sectors, in the same direction as the “smart money.”
One thing that grabbed our attention yesterday was the sharp volume spike in the total market volume of the Nasdaq, which was 22% higher than the previous day. Volume in the Nasdaq broke the 2 billion share barrier for the first time since July 21 yesterday, which means the index had a clear day of institutional accumulation. Given the two lighter volume “up” days and one higher volume “down” day earlier in the week, it was refreshing to see volume confirm the rally in the Nasdaq. Total volume in the NYSE, however, actually came in just below the prior day’s level, further confirming the divergence we spoke of earlier.
Looking at the daily charts of the major indices, I personally see a choppy, divergent mess. The Dow Jones Industrial Average is trying to form a double bottom from its prior low of August, the Nasdaq is testing big resistance of its prior high from earlier this month, and the S&P 500 is in the middle of its recent range. If each of the indices were trending in the same direction, it would be pretty easy to determine which side of the market to take positions in, but the reality is that the market is sending so many mixed signals right now. Although it has been strong, we are reluctant to buy the Nasdaq right now because it is near the top of its range and has resistance of its 200-day MA just overhead. Conversely, it’s difficult to short the Dow because of prior support from the August low. Our recent stop-outs in SPY and HHH short positions have proven how tricky the market is right now, so we are shifting even more to a neutral bias (cash) until the major indices began to once again trade in sync with each other. Let the other traders battle it out; we’ll take a position when the picture becomes clear.
Today’s watch list:
There are no new plays for today.
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.
SPY short (from Oct. 20) –
shorted 110.31, covered 111.26, points = (0.96), net P/L = ($196)
HHH short (re-entry, from Oct. 19) –
shorted 60.20, covered 61.80, points = (1.60), net P/L = ($320)
Both HHH and SPY hit their stops yesterday, so we are flat the ETFs right now.
Edited by Deron Wagner,
MTG Founder and