Commentary:
The broad market modestly rebounded last Friday, enabling the major indices to erase about half of their losses from the previous afternoon and also close the week only slightly negative. A bounce in the Internet sector ($GIN) enabled the Nasdaq to gain 0.8% last Friday, but the Dow Jones lagged behind and only gained 0.4%. The S&P 500 Index closed 0.5% higher. Friday’s gains enabled both the S&P 500 and Nasdaq Composite to close the week with only fractional losses, but the Dow lost another 0.4%. Since the new year began, the Nasdaq has shed 4%, the S&P 2.2%, and the Dow 2.1%.
Unfortunately for the bulls, total market volume in the NYSE declined by 12%, while volume in the Nasdaq came in 2% lighter than the previous day. While the week ended on a somewhat positive note, the lack of an increase in volume failed to confirm the rally. Within the past two weeks, the Nasdaq Composite has closed higher on only three of ten days. However, each of those three “up” days occurred on lighter volume than the previous day. Conversely, four of the seven “down” days were “distribution days,” meaning the Nasdaq closed lower and on higher volume. Obviously, this is the opposite type of price to volume relationship you would see in a healthy market. The lighter volume on the “up” days, combined with the higher volume of the “down” days indicates institutional selling has been under way since the end of 2004. We are maintaining an overall bearish bias until the broad market can break its current pattern by showing at least a few higher volume “up” days.
If the bearish sentiment continues, you can look to the longer-term weekly chart of the S&P 500 to get an idea of where the index is likely to find its next major area of support. Take a look:
The prior highs from the first quarter of 2004 (the blue horizontal line on the chart above) should represent the S&P’s first major area of support, at the 1,157 area. The 20-week moving average, which has converged at the same price, should also provide support. More importantly, however, is support of the primary uptrend line from the low of March 2003. Currently at the 1,136 area, this uptrend line is very important because it has been intact for nearly two years. Overhead, short-term resistance will be found at the 50 and 20-day moving averages, which are at 1,187 and 1,197 respectively. Next, take a look at the Nasdaq Composite’s weekly chart:
As you can see, the Nasdaq has already broken below its prior highs from the beginning of 2004. However, it is still holding above support of its 20-week moving average, which is currently at 2,020. Below that, expect to find support at the Nasdaq’s primary uptrend line, which began with the low of October 2002, rather than March 2003 like the S&P. The Nasdaq has been trading below its 50-day moving average for the past eight days, so expect that to act as a big area of resistance at the 2,111 level. Resistance of the 20-day MA is at 2,127.
This week kicks corporate earnings season into full swing, so we recommend caution entering any individual stocks that may be reporting within the next day or two. If you’re looking for a good source to check on earnings dates, consider checking out Yahoo! Finance.
Today’s watch list:
DIA – Dow Jones Industrial Average Index Tracking Stock
Short
Trigger = below 104.95 (below last Friday’s low)
Target = 102.80 (support of the 200-day MA)
Stop = 105.95 (above the 50-day MA)
Notes = If the Dow breaks below last Friday’s low, we anticipate a new low and selloff down to the 200-day MA.
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:
-
SMH long (from Jan. 14) –
bought 31.38, stop 30.75, target 32.90, unrealized points = (0.03), unrealized P/L = ($9)
RTH short (from Jan. 7) –
short 96.72, stop 99.20, target 92.60, unrealized points = (1.62), unrealized P/L = ($162)
Notes:
Per intraday e-mail alert, we bought SMH last Friday. We also remain short RTH with the same stop.
Edited by Deron Wagner,
MTG Founder and
President