Keeping in line with the stock market’s recent pattern of indecision, the broad market followed up Monday’s gains with a selloff that caused the major indices to each close below their respective lows of the prior day. Both the S&P 500 and Dow Jones Industrial Average lost 0.9%, while the Nasdaq Composite closed 1.2% lower. All three of the major indices closed near their intraday lows, breaking the 3-day pattern of strength during the final thirty minutes of the day. Nearly every sector we follow closed in the red, although the Biotech Index ($BTK) closed marginally higher.
The most significant thing about yesterday’s session was that total volume increased, causing the broad market to register a bearish “distribution day.” Volume in the NYSE increased by 10%, while volume in the Nasdaq came in 15% higher than the previous day. Remember that each of the prior three days (two up days and one down day) occurred on declining volume, so the direction of the broad market on the first day of higher volume is important, as it shows the intentions of institutional activity.
When a market is downtrending and eventually bounces for a few days, it is important to pay attention to whether or not volume increases at that time. If it does, it could be a warning sign that institutional buying interest is returning to the market and the retracement may become significant. If, however, the bounce occurs on lighter volume, the next down day that occurs on higher volume will often mark the end of the bounce and resumption of the downtrend. Because the retracement of the past week occurred on declining volume and yesterday was the first subsequent “distribution day,” there is a good chance the two-month downtrend will now resume. If it does, look for new lows on each of the major indices.
Since we feel there is a good chance the broad market will set new lows over the next few days, let’s take a look at the short-term support and resistance levels on the daily charts of SPY (S&P 500), DIA (Dow Jones Industrials), and QQQQ (Nasdaq 100). We recommend you set alerts for these pivotal levels on your trading software:
While the day-to-day swings in the broad market have been pretty tricky for maintaining positions, the bottom line is that each of the major indices remain firmly below their primary downtrend lines. The S&P has also confirmed difficulty in overcoming its overhead resistance of the prior 2005 lows (the 1,163 level). Most importantly, the declining volume on the up days and higher volume on most of the up days continues to indicate institutions are biased firmly to the sell side. Volume is the one technical indicator that never lies, so it’s probably safe to remain positioned mostly on the short side until you see at least a day or two of higher volume gains in the broad market. If you want to see the “big picture” more clearly and without the recent volatility, consider using longer-term weekly charts instead of daily charts.
Today’s watch list:
As we now have three open positions (DIA and SPY short, PPH long), there are no new trade setups 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 April 7) –
bought 72.80, stop 72.90, target 77.60, unrealized points = + 1.11, unrealized P/L = + $111
DIA short (from April 26) –
short 101.96, stop 103.90, target 97.10, unrealized points = + 0.45, unrealized P/L = + $90
SPY short (from April 20) –
short 114.72, stop 117.10, target 109.20, unrealized points = (0.48), unrealized P/L = ($96)
Per intraday e-mail alert, we shorted DIA yesterday. We also remain short SPY and long PPH.
Edited by Deron Wagner,
MTG Founder and