The major indices began the day on a negative note, but grinded and chopped their way higher to close near the previous day’s highs. An upward push during the final thirty minutes of trading enabled both the S&P 500 and Nasdaq Composite to close with 0.6% gains, while the Dow Jones Industrial Average moved 0.4% higher. The fact that each of the major indices closed positive and at their intraday highs is positive, but volume once again failed to confirm the broad-based gains.
Total volume in the NYSE came in less than 1% lighter than the previous day, although it did increase throughout the afternoon. Volume in the Nasdaq was 3% lower. Yesterday was the lightest volume day in both exchanges since April 11, nearly one month ago. Light volume is positive on a day when the broad market is pulling back from a strong rally, but is not what you want to see when the major indices close higher on a breakout attempt. As we discussed yesterday, the decreasing and lighter than average volume on the up days continues to make us skeptical about the validity of last week’s rally.
Looking at the big picture, not much has changed since yesterday’s broad market analysis. Yesterday’s 0.4% gain in the Dow caused the index to once again close near its 200-day moving average. Yesterday was the fourth consecutive day the index attempted to close above its 200-MA and it did so by only two points. This means that the 200-MA continues to be a key pivotal area of resistance or support going into today. Because it was the fourth attempt, the Dow will probably reverse back down to test its prior lows IF it cannot hold above its 200-day moving average today. Conversely, the index could see a decent upside move if it holds above yesterday’s highs. But given the amount of overhead supply from the prior lows of January and March, we don’t think that will easily happen. When you consider that volume has been declining on each rally attempt, that makes the bullish argument even less appealing. Notice how light the volume was during yesterday’s rally in DIA (Dow Jones Tracking Stock):
The 0.6% gain in the S&P 500 caused the index to close right at resistance of its 50-day moving average. The S&P closed just above last week’s high, but the fact that it do so on the lightest volume in a month was not encouraging. Only a surge of institutional buying interest will provide the necessary momentum for the index to push through its 50-day moving average over the next few days. Remember that resistance of its prior weekly uptrend line also remains intact in the same vicinity. The first chart below shows how SPY (S&P 500 Tracking Stock) closed at resistance of its 50-day MA, while the second chart illustrates the continuing resistance of the prior weekly uptrend line. Like DIA, notice how light volume was in SPY yesterday:
If you feel that last week’s bounce was just a short-lived correction to the broad-based downtrend that began more than two months ago, most of the daily and weekly charts confirm your thinking. There are a few sectors such as Semiconductors that are showing relative strength, and breakouts among individual stocks are now holding up better, but the big picture continues to favor the short side of the market. Selling short a break of support is usually more risky than shorting a bounce into resistance, so you may want to consider testing the waters by entering new short positions at current levels. If the broad market resumes its primary downtrend from these levels, you will be short at very good prices. If, however, the market decides to completely breakout from here, you can quickly cover your short positions with minimal losses. In other words, the risk/reward of being short the broad market at current levels is very positive.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Indu. Avg. Tracking Stock)
Trigger = below 103.18 (below yesterday’s low)
Target = 97.20 (support of October 2004 low)
Stop = 105.35 (above the 50-day MA)
Notes = We are looking to short DIA on a break below yesterday’s low. We anticipate a break to new lows if the DIA fails to reclaim its 200-day MA and reverses from here. Obviously, all bets are off on the short side. if the Dow holds above the 200-day MA. We are ONLY shorting on a break of yesterday’s low, as explained above.
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.
We are now flat.
Edited by Deron Wagner,
MTG Founder and