The Nasdaq Composite snapped its four-day losing streak yesterday, although the rebound was tame. The broad market spent most of yesterday in a narrow, sideways range until buyers stepped in and lifted the major indices higher during the last ninety minutes of trading. The end of day strength enabled the S&P 500 to gain 0.6%, the Nasdaq Composite 0.5%, and the Dow Jones Industrial Average just 0.3%. Confirming the lack of empathy in the markets lately, total volume declined by 1% in the NYSE and 3% in the Nasdaq. Although the major indices closed higher, yesterday’s action remained indecisive overall.
While studying charts of the major indices in an attempt to understand the current environment, we came across a probable explanation for the recent indecision and erratic moves in the S&P. When the S&P 500 broke out to a new multi-year high on March 4, it technically should have followed through to higher prices, as most new 52-week highs typically do. However, it appears that the March 4 breakout may have failed because the S&P ran into resistance of its 61.8% Fibonacci retracement, as measured from its year 2000 high down to its October 2002 low. For those of you who are not familiar with the primary Fibonacci numbers, suffice it to know that the 61.8% retracement level of any trend is typically the last area of resistance before a trend resumes. If a market or stock retraces more than 61.8% of a trend, it usually will completely reverse the prior trend. However, a market’s inability to retrace beyond the 61.8% level usually results in a resumption of the prior trend. In this case, the S&P’s inability to rally above its 61.8% retracement of the 2-year downtrend from the years 2000 to 2002 would mean that the uptrend of the past two years was simply a correction within the context of a primary, long-term downtrend. Conversely, a breakout above that 61.8% retracement level would indicate the long-term downtrend from the year 2000 high is no longer valid. We have annotated the primary Fibonacci retracement levels on the long-term monthly chart of the S&P below:
Obviously, we’re looking at too big a time frame to be beneficial in your short-term trading operations. But occasionally keeping an eye on pivotal levels on the long-term charts is a great way to make sure you keep the “big picture” in your head. As for the short-term. . .
Going into today, the major indices remain in “no-man’s land.” Both the S&P and Dow continue to trade below their March 4 breakout levels that briefly resulted in new multi-year highs. The failed breakout levels will continue to act as overhead resistance, so watch those levels carefully on any further rally attempt today. For the S&P, that level of horizontal price resistance is around 1,213. On the Dow, the key resistance level is around 10,855 – 10,860. Conversely, one possible reason for the end-of-day strength in the S&P and Dow was that both indices came into support of their primary uptrend lines that began with their January lows. The daily charts below illustrate both support of their uptrend lines (the ascending blue lines) and resistance of their prior breakout levels (the horizontal red lines):
With the uptrend lines providing support from below, but the prior breakout levels providing resistance overhead, a big move in either direction is bound to happen soon. When it does, we’ll be happy because perhaps it will provide us with a tradeable trend that lasts more than a day or two. However, as long as the major indices remain above their uptrend lines (and 50-day moving averages), but below their prior breakout levels, we expect the choppy and indecisive market action to continue. As we discussed thoroughly in yesterday’s newsletter, we feel the smartest play right now is be positioned mostly in cash, patiently waiting for clear signals of the market’s next major move.
Today’s watch list:
There are no new plays for today.
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.
PPH long (from Feb. 22) –
bought 72.19, sold 71.90, points = (0.29), net P/L = ($31)
PPH hit our stop yesterday, so we are now flat.
Edited by Deron Wagner,
MTG Founder and