Commentary:

The major indices ended their four-session losing streak yesterday, although the gains were not very impressive. The S&P 500 and Nasdaq Composite both began the day with an opening gap up to the previous day’s highs, but the buying interest quickly faded. The major indices spent the first several hours trading sideways, but eventually gave up a portion of their gains by drifting lower into the close. The Dow Jones Industrial Average showed the most relative strength and closed 0.9% higher. The Nasdaq Composite gained 0.6%, but the S&P 500 only gained 0.4%.

Total market volume, the biggest barometer for confirming reversal days, started out strong, but declined throughout the session. Volume in the NYSE came in 7% higher than the previous day, but volume in the Nasdaq declined by 6%. Despite the S&P and Dow percentage gains, breadth was barely positive. On the first reversal attempt of a multi-day selloff, it would have been more bullish to see a decent surge in volume and firmly positive market breadth.

Since we have spent the past several days extensively looking at annotated daily, weekly, and monthly charts of the major indices, we won’t be redundant by analyzing the same support and resistance levels that remain in effect. However, one ETF that has an interesting looking chart is IWM, which is the ETF that tracks the Russell 2000 Small Cap Index. Specifically, let’s take a look at its weekly chart below:

Looking at the chart above, notice how IWM has sold off down to support of its prior highs from the first four months of 2004, as annotated by the blue horizontal line. The most basic tenet of technical analysis is that a prior resistance level becomes the new support level after the resistance is broken. As such, the four months of resistance that occurred in the first part of 2004 should technically act as support. Therefore, this type of pattern would normally present a low risk entry point to buy an intermediate-term position of IWM. However, we have also learned over the years that when market sentiment suddenly becomes bearish, key support levels will often fail, thereby creating profitable shorting opportunities because the bulls become “trapped.” The break of a 5-month uptrend, as illustrated by the red ascending line, further increases the odds of breaking below support of the prior highs.

By pointing out the weekly chart of IWM, we are not advocating a long entry, nor are we recommending you sell short without a break of support. However, we do feel that IWM is likely to make a big move in one direction or the other within the next several weeks. We don’t know which direction it will go, but it really doesn’t matter. The point is that a move in either direction is likely to be significant and worthy of entering a position, whether long or short. You may want to put this one on your radar and set alerts both below the support level and above the current week’s high. It’s unlikely IWM will simply remain at its prior high for long without making a big move in one direction or the other.

Don’t forget that we remain smack in the middle of corporate earning’s season, which is never a good time to aggressively enter new positions. As always, be sure to trail your stops and be disciplined. Most importantly, remember to Trade what you see, not what you think!

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Today’s watch list:

Due to being in the middle of earnings season, there are no new setups for today. We do, however, remain short both SPY (half position) and DIA from last week.

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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:

DIA short (from Jan. 20) –
shorted 104.95, stop 105.90, target 101.49, unrealized points = + 0.36, unrealized P/L = + $72

SPY short (HALF position, from Jan. 21) –
shorted 117.35, stop 118.35, target 115.35, unrealized points = + 0.47, unrealized P/L = + $47

Notes:

No changes to the positions above.

Edited by Deron Wagner,
MTG Founder and
President