The major indices staged a decent rally during the first half of last Thursday’s session, but the trend reversed in the afternoon as traders sold stocks ahead of the three-day holiday weekend. The Nasdaq Composite was showing a 0.9% gain at its intraday high, but reversed to close the day unchanged. Both the S&P 500 and Dow Jones Industrial Average were also showing solid gains in the late morning, but the afternoon reversal caused both indices to close the day 0.1% lower. Not surprisingly, last Thursday’s pre-holiday volume declined by 25% in the NYSE, but total market volume in the Nasdaq only came in 5% lighter than the previous day. Overall, price and volume activity showed a bearish week for the broad market, but at least we saw the development of a tradeable trend instead of the choppy and indecisive action that plagued the prior weeks. For the holiday-shortened week, the Dow Jones Industrial Average registered a 1.7% loss, while the S&P 500 lost 1.5%. The Nasdaq Composite showed a bit of relative strength, but still lost 0.8%.
In the Nasdaq Composite, keep a close eye on the 2,000 level this week, as it correlates to two important levels of resistance. First, large round numbers such as “2,000” always act as key psychological support or resistance levels because many investors and traders place their stops at large round numbers, which causes those round numbers to become major areas of support or resistance. The 10,000 level on the Dow, for example, has acted both as an area of support and resistance over the past several years, even though there is nothing technically special about the number. More importantly, the 2,000 level also correlates (within a few points) to resistance of the Nasdaq’s 200-day moving average, which it closed below last week for the first time since October 26, 2004. The 200-day moving average, currently at 1,992, was probably a factor in Thursday’s afternoon selloff. The 200-day MA always acts like a rock-solid area of support or resistance on all the major indices, so traders were focused on that level towards the end of last week. The daily chart of the Nasdaq below illustrates how the index closed last week just below both its 200-day MA and the 2,000 level:
While the Nasdaq chart is looking pretty bearish, we still don’t feel confident recommending aggressive short positions in the Nasdaq because of the continued relative strength in the Semiconductor Index ($SOX), which probed below its 200-day MA for a few days last week, but closed the week just above it. Basically, the direction of the Semis in the coming week is likely to “make or break” the Nasdaq. Instead of shorting QQQQ or tech-related ETFs, you may consider initiating short positions in SPY (S&P 500 Index) or DIA (Dow Jones Industrial Average) IF either index breaks below their January lows this week. The Dow, for example, closed last week only 74 points above its low of 2005. Key support of its prior low of 10,368 is likely to be tested in the coming days. Interestingly, the 200-day MA also converges with the prior low from January:
The S&P 500 is further above its 200-day MA than the Dow, but still closed only 8 points above its prior low from January. A break below that would represent a new low for 2005. The prior low is annotated as the blue horizontal line on the chart below:
Both the S&P and Dow are close to their prior lows from January, while the Nasdaq is hanging around its 200-day MA. Therefore, we feel the broad market is approaching a critical “make or break” level this week. If the prior lows from January are broken in the S&P and Dow, it will obviously be bearish, but would also indicate a continuation of the current downtrend. Conversely, it’s also possible the major indices may find support at current levels and form double bottoms at their prior lows and 200-day MAs. So, be careful on both sides of the market this week and, as always, make sure your stops are in place. As for our positions, we feel comfortable maintaining the short positions in both IWM (Russell 2000 Small Caps) and MDY (S&P Mid-Caps) because both indices showed relative weakness last week and closed near their lows. Furthermore, we have a profit buffer of unrealized gains on both positions, which affords us the luxury of a slightly looser stop in an effort to maximize gains. We are also long SMH once again, as it triggered last Thursday morning.
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.
IWM short (HALF from March 16, HALF from March 22) –
shorted 125.04 (avg.), stop 123.30 on HALF, stop at 125.85 on second HALF, target 120.10, unrealized points = + 2.94, unrealized P/L = + $294
MDY short (from March 23) –
shorted 120.11, stop 122.28, target 116.05, unrealized points = + 0.12, unrealized P/L = + $12
SMH long (from March 24) –
bought 32.90, stop 32.20, target 34.75, unrealized points = (0.25), unrealized P/L = ($75)
No changes to stops on IWM and MDY. SMH long triggered.
Edited by Deron Wagner,
MTG Founder and