After wrapping up a bearish week, the major indices each closed higher yesterday, but the gains were marginal and overall volume did not confirm. It was a choppy intraday session, particularly in the Nasdaq, but the Dow Jones Industrial Average gained 0.4%, the S&P 500 gained 0.2%, and the Nasdaq Composite managed a measly 0.1% gain. As in the prior day, each of the major indices were trading much higher during the first half of the session, but later fell victim to selling pressure and closed near their intraday lows.
Despite a 25% decline in last Thursday’s pre-holiday weekend, total market volume in the NYSE failed to return yesterday. Instead, volume in the NYSE declined by another 1% while volume in the Nasdaq came in 10% lighter than the previous day. The fact that volume declined on one of the broad market’s rare “up” days is bearish. Further confirming the bearish action is the fact that, despite the broad market’s percentage gains, market breadth was negative. Declining issues outpaced advancing issues by approximately 4 to 3 in the NYSE and 8 to 7 in the Nasdaq. A healthy market would show firmly positive breadth on a day of broad-based gains.
In our daily market analysis, one factor we constantly pay attention to is whether the institutional or “smart money” is biased overall more to the buy or sell side. Because of the massive buying power that funds and other institutions possess, it is estimated that approximately eighty percent of the broad market’s volume on any given day is a direct result of institutional trading. Therefore, the markets typically move in the direction of institutional money flow, regardless of what the retail investors are doing with their money. This is why we analyze the broad market’s volume on a daily basis. By focusing on the broad market’s price change in relationship to its volume change, we can see “under the hood” and determine what institutions are doing. When the broad market closes higherand on higher volume, it indicates institutional buying or “accumulation.” Conversely, a market that closes lower and on higher volume indicates institutional selling or “distribution.” An sudden abundance of accumulation and distribution days typically precedes primary trend reversals in the major indices, which is why we began initiating short positions two weeks ago. However, another useful method for determining institutional activity is to pay attention to the direction of the market during the final ninety minutes of trading every day.
In any given day, the first 30 to 45 minutes of trading is often referred to as “amateur hour” because many retail investors place their orders as soon as the market opens. Conversely, the direction of the market’s trend during the final 60 to 90 minutes of each day is typically determined by institutions, many of whom initiate large orders only after assessing market action throughout the first half of the day. Because of this, a strong market that is seeing institutional “accumulation” will often close the day near its intraday high, while a weak market that is seeing institutional selling will often close near its intraday low. While studying intraday market action of the past four days, we quickly noticed that the broad market has trended higher during the first half of each session, but has sold off sharply into the close. On three of the last four days, the Nasdaq Composite has closed near its intraday lows, despite trading much higher in the late morning or mid-day. Below are intraday charts of both the S&P 500 and Nasdaq Composite that illustrate this bearish action of the past four days:
Obviously, the fact that the major indices keep losing their mid-day gains is bearish. When coupled with the fact that we continue to see high volume “down” days and lighter volume “up” days, we get a clear picture that institutions continue to be clearly biased to the sell side.
In yesterday’s Wagner Daily, we looked at daily charts of the three major indices and illustrated the pivotal support and resistance levels to watch this week. Yesterday’s marginal gains means that both the S&P and Dow continue to hold above their January lows, but the Nasdaq remains stuck below the 2,000 price level. It also closed exactly at its 200-day MA, which has been acting like a magnet over the past several days. Watch for a breakaway move in either direction of the 200-day MA and don’t be too heavy on either side of the market for the time being. If the S&P and Dow break their January lows and their 200-day MAs, the bearish picture will be clear. But for now, the risk/reward of initiating new short positions is not very good. If you’re already short, consider staying short but simply tightening up your stops.
Today’s watch list:
There are no new plays for today, but we remain short IWM, short MDY, and long SMH.
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 = + 2.89, unrealized P/L = + $289
MDY short (from March 23) –
shorted 120.11, stop 122.28, target 116.05, unrealized points = + 0.3, unrealized P/L = + $3
SMH long (from March 24) –
bought 32.90, stop 32.20, target 34.75, unrealized points = (0.34), unrealized P/L = ($102)
No changes to stops on open positions.
Edited by Deron Wagner,
MTG Founder and