Commentary:
The broad market gapped up yesterday morning and traded sideways to lower throughout the first half of the day, but buyers took control at mid-day and sparked a strong afternoon rally in each of the major indices. The S&P 500 gained 2.0%, the Dow Jones Industrials moved 2.1% higher, and the Nasdaq Composite tacked on 2.5%, impressive gains across the board. Each of the major indices also closed near their intraday highs and at their best levels of the week. Nearly every industry sector we track closed higher, although the tech-related sectors such as Internet, Semis, Software, and Hardware showed the strongest performances. Given how much the techs have sold off over the past several months, it was not surprising to see those sectors lead the way when the broad market bounced.
Total market volume in the NYSE came in 3% higher than the previous day’s level, which made yesterday a bullish “accumulation day” in the S&P and Dow. Volume in the Nasdaq, however, actually declined by 3%. Nevertheless, breadth was firmly positive in both exchanges. Advancing volume outpaced declining volume by a margin of nearly 9 to 1 in the Nasdaq and more than 5 to 1 in the NYSE. The combination of the increased volume and better overall market internals made yesterday’s rally much more significant than the recovery attempts of April 18 and 19.
After four days below it, the S&P 500 closed back above its 200-day moving average. However, the index stopped shy of its major price resistance at the 1,163 level. As you may recall, the 1,163 area represents the prior lows of January and March 2005, as well as the highs of early 2004. Remember that prior support becomes the new resistance level once the support is broken. As such, expect the 1,163 area to provide a considerable amount of price resistance on any follow-through rally attempt to yesterday’s gains. The daily chart below illustrates how the S&P 500 closed just shy of the 1,163 resistance:
Despite yesterday’s 2.1% advance in the Dow, the index continues to show relative weakness to the S&P, as it remains well below both its 200-day moving average and resistance of its prior lows from 2005. Interestingly, the 20-day MA, 200-day MA, and horizontal price resistance from the prior lows have all converged together at the 10,365 area. The daily chart of the Dow below illustrates this triple convergence of resistance:
Yesterday’s broad-based rally does indeed make us a bit cautious about entering new short positions here, but a lot of overhead supply remains as resistance. Aggressively buying new stock and ETF positions here does not make much sense UNLESS the S&P can rally and hold above its prior resistance at the 1,163 level. For the Nasdaq, we would want to see the index rally back above its 200-day MA, 28 points above yesterday’s close. Until either of those scenarios happen, we remain positioned mostly on the short side of the market. We do, however, continue to believe that being long the Biotechs and Pharmaceuticals is one of the better trades you can make on the long side of the market. BBH, for example, closed at a new 52-week high yesterday.
Remember that corporate earnings season is in full swing. We recommend you take it easy with the quantity of open positions you are holding until earnings season has passed. Most importantly, beware of holding companies through their scheduled earnings announcement dates.
Today’s watch list:
There are no new trade setups for today, although we remain long PPH and short SPY.
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.
Closed Positions:
-
(none)
Open Positions:
-
PPH long (from April 7) –
bought 72.80, stop 72.90, target 77.60, unrealized points = + 1.73, unrealized P/L = + $173
SPY short (from April 20) –
short 114.72, stop 117.10, target 109.20, unrealized points = (1.29), unrealized P/L = ($268)
Notes:
No changes to the open positions.
Edited by Deron Wagner,
MTG Founder and
President