The broad market wrapped up last week on a positive note, as each of the major indices turned in respectable gains and closed higher for the third consecutive day. Follow-through strength in the Semiconductor Index ($SOX), which gained another 2.2%, enabled the Nasdaq to move 0.7% higher last Friday. Continued relative weakness in the Internet and Wireless sectors, however, held the Nasdaq rally in check. The S&P 500 and Dow Jones Industrial Average both kept pace with the Nasdaq, as both indices closed 0.9% higher. A 13% decline in total market volume prevented the Nasdaq from registering another bullish “accumulation day,” but many leading stocks within the Nasdaq broke out on strong volume. Overall volume in the NYSE was fractionally higher. Although total volume was not very exciting, advancing volume in the NYSE exceeded declining volume by a margin of nearly 4 to 1.
The big highlight of Friday’s session was that the $SOX closed above resistance of its 200-week moving average for the first time in three years! As you know, we have been bullish on the $SOX ever since the index initially broke out on February 4, and last week’s close above the 200-week MA was very encouraging. Since the beginning of 2004, the $SOX has touched its 200-week moving average on six separate occasions, but last week marked the first time the index actually closed the week above it. The chart of the $SOX below illustrates the break above the 200-week MA, which we began anticipating ever since the $SOX formed its first “higher low” in January and broke out on February 4:
Note that a weekly breakout above an important moving average cannot be confirmed after only one week, so we need to see the sector hold above that level in the coming week. Ideally, it would be good to see the $SOX consolidate and trade sideways near its highs this week. Such price action would build a base that should enable the $SOX to blast off to new highs the following week. As for resistance, watch the prior high from December 2004, which is at 453. A weekly close above the high of last December would cause the $SOX to form its first “higher high” on the weekly chart, which would also represent a confirmed trend reversal due to the “higher low” that was formed in January. Hopefully you have been profiting from a long position in SMH, which we first brought to your attention when we bought it on February 7. As of last Friday’s close, SMH is showing us an unrealized gain of 5.8%, but we will continue to trail a stop to maximize the profit.
Looking at the daily charts of both the S&P 500 and Dow Jones Industrials, you will see that both indices are now testing horizontal price resistance levels from their prior highs of both earlier this month and last December. We see both indices as being at critical “make it or break it” levels that will either result in breakouts to new 52-week highs OR sharp reversals lower. If the S&P and Dow fail to break out from here, it will represent “triple tops” on both indices. The thick red horizontal line on the charts below illustrate this key area of resistance on both indices:
The Nasdaq Composite continues to lag and remains below its 50-day moving average, but we feel that strength in the Semis will enable the index to “catch up” to both the S&P and Dow. Strength in the semis should also help the S&P to break out to a new high. Regardless of the outcome, remember to always Trade what you see, not what you think!
Today’s watch list:
There are no new trade setups for today, although we remain long both SMH and PPH.
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, new stop 33.20, target 34.90 on HALF, no target on second HALF (will trail stop), unrealized points = + 1.89, unrealized P/L = + $567
PPH long (from Feb. 22) –
bought 72.19, new stop 71.10, target 76.75, unrealized points = + 0.28, unrealized P/L = + $28
We have raised the stops on both open positions.
Edited by Deron Wagner,
MTG Founder and