The broad market began yesterday on a slightly negative note, but a mild mid-day rally enabled both the S&P 500 and Dow Jones to close unchanged and the Nasdaq Composite to lose only 0.1%. Despite the afternoon rally, the broad market’s intraday trading range remained narrow. As the bulls want to see on days when the market takes a rest, volume also declined in both exchanges. Total market volume in the NYSE was 2% lower than the previous day, while volume in the Nasdaq came in 9% lighter. Although the major indices failed to make headway, major relative strength was found in the Oil Refining and Oil Service sectors, as well as Utilities. The Oil Service Index ($OSX) gained 2.6%, the AMEX Oil Index ($XOI) gained 2.1%, and the Dow Jones Utilities Average tacked on another 0.9%. All three indices once again closed at new 52-week highs. Basic Materials also rallied sharply, particularly iron and steel stocks. The Semiconductor Index ($SOX) broke its four-day winning streak and lost 0.8%, but is now consolidating nicely below its 200-week moving average.
Aside from the Semiconductor Index, which we have discussed extensively during the past two weeks, it’s important to remember that both the S&P and Dow Jones Industrial Average remain in close proximity to their prior 52-week highs, which were established last December. Because the January selloff happened so quickly, it is likely that traders and investors will be selling into any rallies that test the highs of December. This is what creates overhead supply and horizontal price resistance levels. The Dow Jones is a good example of this, as the intraday high of the past two days has correlated to the closing high of last December. The horizontal line on the daily chart of the Dow below illustrates resistance of the prior high:
Similarly, the S&P is within striking distance of its prior highs, as the chart below illustrates:
Because of these prior highs, we continue to recommend caution against aggressively entering new long positions, particularly those that are part of the S&P or Dow. Due to the institutional sector rotation we have noticed during the past several weeks, we still feel the tech-related sectors such as Computer Hardware or Semiconductors offer a better risk/reward than some of the Dow/S&P sectors that have gotten quite overextended in the short-term. Specifically, we recommend tightening the stops if you’re long Utilities, Oil, or Basic Materials.
Although we recommend caution with entering new long positions, we do not yet see any technical confirmation to initiate new short positions in the broad market. If both indices had only retraced 50% to 61.8% (Fibonacci number) of their January losses, it would present us with a low-risk entry point on the short side (as we attempted a few weeks ago). But both the S&P and Dow have retraced more than two-thirds of their respective losses from January, which increases the odds of further upside to at least test the December highs. We’ve also seen the 50-day moving average act now acting as support on the S&P 500 during last week’s correction. Conversely, the Nasdaq Composite remains below resistance of its 50-day MA, but the current relative strength in the Semiconductors and Computer Hardware stocks makes it a bad risk to attempt shorting QQQQ or ONEQ.
One probable reason for the broad market’s low volatility yesterday was that Alan Greenspan is scheduled to testify on Monetary Policy before the House of Representatives later today. Expect trading to remain on the light side today as well, at least until Greenspan has finished. With the exception of a few pockets of tradeable sector strength, we think a mostly cash position is wise in the short-term.
Today’s watch list:
There are no new setups today, although we remain long SMH (with a 4% unrealized gain now). We are considering shorting IWM (Russell 2000 Small Cap Index) due to its recent relative weakness, but only on a break below its 50-day moving average. As always, we will send an e-mail alert to subscribers if/when we do so.
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 = + 1.21, unrealized P/L = + $366
No changes to the stop or target today.
Edited by Deron Wagner,
MTG Founder and