The broad market drifted sideways in an extremely narrow range yesterday, as volume declined further ahead of the New Year’s Day holiday. Both the S&P 500 and Nasdaq Composite closed unchanged, but the Dow lost 0.2%. Total market volume in both the NYSE and Nasdaq declined by 5%, which means both exchanges remained well below average volume levels. Key market internals showed a mixed bias, which further confirmed the lethargic session.
The intraday trading range of the S&P 500 yesterday was an incredibly tight 3 points! Although we cannot say with certainty, it has probably been at least a year since the index traded in such a narrow range (on a percentage basis). Needless to say, tight intraday ranges usually present little opportunity for new trade entries due to the lack of volatility. However, a few individual market sectors diverged and showed relative strength yesterday. Specifically, the Semiconductor Index ($SOX) moved up above both its 20-day moving average and its trading range of the past two weeks. In yesterday’s newsletter, we discussed how the volatility contraction in that index was likely to result in a significant move in either direction over the next week. While the index only gained 0.9% yesterday, it now appears poised to break out above resistance of its 200-day moving average, which lies just overhead. The daily chart of the $SOX below illustrates this:
As you can see, the direction of the Semis over the next several days will determine the intermediate-term direction of the sector. A failed break above the 200-day MA on this attempt would send the index back below its 50-day moving average, which has perfectly acted as support throughout the current month. However, a breakout above the 200-day MA on this attempt would likely spur short covering and institutional buying interest. We bought SMH (Semiconductor HOLDR) when it traded above its pivot yesterday, but we are using a tight stop to protect against a failed breakout due to overhead supply. Many of the Biotech stocks also continued their advance yesterday, which pushed our long position in BBH (Biotech HOLDR) up to an unrealized gain of nearly 8.5 points. We will continue trailing a stop on that position in order to protect gains and maximize profits.
The stock markets are open every day this week, but we expect overall volume and institutional participation to remain lighter than average until the new year. As such, this will make it difficult to determine the validity of any trends that may develop. When the institutional money returns after the new year, its participation will quickly determine the short-term direction of the markets. But, in the interim, we continue to recommend you take a more cautious stance on both sides of the market. In particular, be sure your stops are in place to protect any sudden reversal of trends that may develop, which can easily occur on light volume days.
Today’s watch list:
There are no new setups for today, although we remain long BBH and now SMH.
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.
BBH long (HALF position, from Dec. 9) –
bought 146.60, new stop 154.20, target 160.20, unrealized points = + 8.40, unrealized P/L = + $420
SMH long (from Dec. 29) –
bought 33.17, new stop 32.75, target 35.30, unrealized points = (0.04), unrealized P/L = ($9)
Note the new stops on both BBH and SMH, which triggered yesterday.
Edited by Deron Wagner,
MTG Founder and