The broad market wrapped up last week with an uneventful day of trading last Friday, as the major indices showed little direction and again closed the day near unchanged levels. Follow-through relative strength in the tech-related sectors enabled the Nasdaq Composite to close the day with a 0.3% gain, but the S&P 500 Index closed 0.1% lower. The Dow Jones Industrial Average closed flat. There was divergence among the intraday performance of the major indices because the Nasdaq closed in the middle of its range, but both the S&P 500 and Dow Jones Industrials closed at their lowest levels of the session. Last Friday marked the second consecutive day in which the Nasdaq Composite closed flat to higher while the S&P 500 closed lower.
Corresponding to the broad market’s lack of direction was the fact that volume in both exchanges tapered off last Friday. Total market volume in the NYSE declined by 15%, while Nasdaq volume came in 13% lighter than the previous day’s level. Overall volume rose during last Wednesday’s breakout day, then dropped off in the two subsequent days. Given that the S&P held on to most of the May 4 gains on Thursday and Friday, it is a positive that volume dropped off during the two-day price correction. On the other hand, the volume increase that accompanied the May 4 breakout was not very impressive. This means that the price to volume relationship of the broad market has leaned toward the bullish side during the past three days, but has not indicated a significant return of institutional buying interest. This tells us to remain cautious with long positions in the coming week, but not to be too complacent with remaining short positions either.
Taking an updated look at the daily chart of the Dow Jones Industrial Average, you will notice that the index has stalled at resistance of its 200-day moving average for the past three days. As you may recall, this means that the Dow has also failed to hold above resistance of its prior lows from both January and March of 2005. The Dow’s difficulty in reclaiming its 200-day MA is not surprising. When an index drops below its 200-day MA and remains firmly below it for nearly a month, it seldom rallies back above it on its first attempt because the prior support becomes the new resistance after the support is broken. Therefore, keep a close eye on the Dow’s 200-day MA resistance in the coming week:
Although the Nasdaq Composite has begun to show relative strength to both the S&P and Dow, it’s a risky proposition to aggressively initiate new long positions because the 50 and 200-day moving averages have converged overhead. When two very important moving averages converge at a price overhead, it typically becomes very difficult for an index to rally above that level without a massive burst of upside volume. The convergence of the 50 and 200-day MAs is currently at the 1,992 area, which is 25 points above Friday’s closing price:
As for the S&P 500, it is the only one of the three major indices trading above its 200-day moving average, but it will need to contend with the overhead of its 50-day moving average, which is only 8 points above Friday’s close of 1,171. Resistance of the prior uptrend line from the August 2004 low also remains a major level of resistance. We plan to lay low during the first few days of the new week because the charts are showing many mixed signals that could cause trading conditions to become choppy and erratic. If all three of the major indices can reclaim their 200-day moving averages, we would be more comfortable going long. But unless that happens, our bias remains cautiously on the short side.
Today’s watch list:
We are now flat the ETFs, but will send intraday e-mail alert to subscribers if/when we enter new positions 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, sold 75.75, points = + 2.95, net P/L = + $292
Per intraday e-mail alert, we raised the stop on PPH last Friday and were stopped out with a 3-point gain. We are now flat.
Edited by Deron Wagner,
MTG Founder and