The broad market started off on quite a strong note yesterday morning, but key resistance levels in the Nasdaq and Semiconductor indices caused the major indices to abruptly retrace most of their gains in the afternoon. After the first two hours of trading, the Nasdaq Composite was trading 1.0% higher, but resistance of its 50-day moving average caused the index to reverse and close the day with only a 0.3% gain. The S&P 500 also closed 0.3% higher, although it was less volatile throughout the day. The Dow Jones Industrial Average gained 0.4%. The Semiconductor Index ($SOX) showed major strength throughout the first half of the day and was trading as much as 2% higher, but it ran into resistance of its 200-week moving average and closed the day “only” 0.7% higher.
Total market volume in both exchanges increased sharply over Monday’s lethargic levels. Volume in the NYSE rose by 18%, while volume in the Nasdaq came in 27% higher. While it may sound like volume was huge, turnover on both exchanges was only on par with average levels because Monday’s volume was so light. But the fact that each of the major indices closed higher and on higher volume means that yesterday was another bullish “accumulation day,” the second within the last three sessions. However, it would have been much better if the Nasdaq had closed near its intraday highs, rather than the lower half of its range.
If you were only paying attention to intraday charts during yesterday morning’s rally, you might have been inclined to assume the broad market would maintain its strength throughout the entire session. But a quick look at the daily chart of the Nasdaq Composite and the weekly chart of the $SOX Index would have quickly put you on the defensive. For the Nasdaq, yesterday was the first time the index tested resistance of its closely watched 50-day moving average since January 10. Because the 50-day moving average is powerful, it is rare that an index or ETF will push through its resistance (or break below its support) on the first attempt. When an index is attempting to reverse a downtrend, a more common scenario is for the index to test resistance of its 50-day moving average, back off intraday, then consolidate a few days before attempting to break out again. This typically occurs because many traders place their sell orders near the 50-day moving averages of the major indices, which in turn creates a lot of overhead supply. On the daily chart below, notice how the Nasdaq Composite barely probed above the 50-day moving average before reversing and closing lower:
Of equal or greater importance to the Nasdaq’s test of the 50-day moving average was the Semiconductor Index’s test of its 200-week moving average. We have been discussing the importance of the 200-week MA on the $SOX for the past two weeks and yesterday gave us a taste of just how many traders are aware of that resistance level. The $SOX traded above the 443 level for about two hours, but sellers promptly took control. Nevertheless, this should not be too surprising given how powerful of a resistance level the 200-week moving average has become. Remember that it has been three years since the $SOX has closed a week above the 200-week moving average, so there are bound to be some traders and institutions who will do everything in their power to hold the index down. The $SOX has also had four consecutive weeks of gains, so a sideways consolidation for a week or two, right below the 200-week MA, would actually be quite healthy for the index. The weekly chart of the $SOX below shows how the index immediately backed off after testing the 200-MA:
Given yesterday afternoon’s bearish broad-market action, we would be careful entering new long positions today. Both the S&P 500 and Dow Jones Industrials are nearing resistance of their prior 52-week highs from December, the $SOX has its 200-week MA overhead, and the Nasdaq Composite must contend with its 50-day MA. If the major indices do indeed push through their respective resistance levels, it will be a “no-brainer” to be on the long side of the market, especially given the confirmation of the $SOX. However, IF the broad market is going to head lower again, this is a prime place where it would do so. Therefore, we recommend caution on all new trade entries over the next few days, although we feel it remains low risk to be long in the Semis and Computer Hardware sectors. As always, remember to trade what you see, not what you think!
Today’s watch list:
There are no new setups today, although we remain long SMH (with a 5% unrealized gain now).
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.
SMH long (from Feb. 7) –
bought 32.55, stop 32.25, target 34.90 on HALF, no target on second HALF (will trail stop), unrealized points = + 1.55, unrealized P/L = + $452
No changes to the stop or target today.
Edited by Deron Wagner,
MTG Founder and