After only three days of consolidation near the highs, the major indices resumed their recent uptrends and each broke out to fresh highs yesterday. The Semiconductor Index ($SOX), which closed 2.1% higher, recovered nearly all of the previous day’s loss. This enabled the Nasdaq to gain 1.3% due to strength in the tech-related sectors. The S&P 500 and Dow Jones Industrials also fared well and gained 0.9% and 0.8% respectively. While the gains were broad-based, the one negative is that volume declined by 7% in the NYSE and was 4% lighter in the Nasdaq. Total market volume on both exchanges came in above average levels, but it would have been more bullish to have an “accumulation day” (higher closing price AND on higher volume). Prior to the current week, the broad market was closing higher and on higher volume, while the “down” days were occurring on lighter volume. However, the last three days in the S&P 500 have consisted of two “down” days on HIGHER volume and one “up” day on LIGHTER volume. When the volume patterns start to shift like this, it often indicates the market is near a short-term top. Nevertheless, the daily and weekly charts are beginning to look quite bullish for the intermediate-term.
The Nasdaq finally rallied above resistance from its prior high at the 2,055 level, which was set in June of this year. However, there are four weeks of price resistance from April that the index still needs to contend with in order to really get moving. If this occurs, the Nasdaq should be able to quickly rally up to the 2,150 area and test its 52-week high from January. But, the picture is fuzzier than the S&P, which is already at a new 52-week high. The weekly chart of the Nasdaq below sums it up:
Taking a look at the weekly chart of the Dow, we see similar resistance from its prior highs:
Watch the Dow closely because it has been the weakest of the three major indices during the rally of the past month. IF the Dow is going to head back down, this is the point where it will do it. But, if it consolidates and clears these highs, it will be quite bullish.
Yesterday’s rally in the S&P 500 pushed the index to a new high not seen since March of 2002. The prior highs from March of 2004, which we have been watching closely, acted perfectly as support during this past week’s “correction by time.” The blue horizontal line on the weekly chart below illustrates how the prior highs from March are now acting as the new support level:
Because the S&P is trading at a nearly 3-year high, there is essentially no overhead supply (resistance). This, however, is not the case with the Nasdaq. Regardless, resistance from prior highs that occurred more than one year ago typically has a minimal impact because most people who wanted out of their positions have already done so. The combination of the new price support at the prior highs from March (the 1,160 to 1,163 area) and the lack of overhead supply means your odds clearly continue to favor the long side of the market. The S&P 500 remains quite far extended from support of its 20-day moving average, but indexes and stocks will always follow the path of least resistance. This is the reason we cautioned against shorting the S&P this week, even though it is over-extended on the daily chart. “The trend is your friend” is an overused, but extremely accurate cliche that traders refer to in times such as these. Your risk is lower and your odds of profitability greater if you don’t use Western logic and instead simply trade in the direction of the trend. Put another way, Trade what you see, not what you think!
Today’s watch list:
IEF – iShares 7 – 10 year T-bill index
Trigger = below 84.72
(below the 200-day MA)
Target = 83.40 (61.8% Fibo retracement of last primary move higher)
Stop = 85.30 (above yesterday’s high)
Notes = This setup did not trigger yesterday, but we are still stalking it for entry today. IEF (and the other bond ETFs) are poised to break support of their prior lows after barely setting a higher high on the last rally attempt. We feel Wednesday’s FOMC meeting will put further downward pressure on bond prices, which move inversely to yields. Therefore, we are looking to short IEF on a break below the 200-day MA and triple bottom. Note that IEF has a low beta, so it is not very volatile. As such, we trade larger position size to compensate. Reference the MTG Position Sizing 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.
The IEF short did not trigger yesterday, but we still like the setup and are stalking it for entry today.
Edited by Deron Wagner,
MTG Founder and