The major indices followed up last Friday’s surge with another day of broad-based gains yesterday. Thanks to momentum from the previous day’s strong close, stocks began the day with an opening gap up, traded in a tight and narrow range throughout the afternoon, then rallied during the final ninety minutes. A wave of selling hit the markets in the last fifteen minutes, but the major indices retained most of their gains nevertheless. The Nasdaq Composite, which showed relative weakness the prior day, played “catch up” and cruised 1.5% higher. The S&P 500 gained 0.7% and the Dow Jones 0.4%. Small and mid cap stocks also soared alongside the Nasdaq, as the Russell 2000 advanced 1.8% and the S&P Midcap 400 closed with a 1.6% gain. For the month of October, the major indices lost the following amounts: Nasdaq Composite (1.4%), S&P 500 (1.8%), and the Dow Jones (1.2%). If not for the substantial gains in the last two trading days of the month, each of those losses would have been more than doubled.
The most positive thing about yesterday’s session is that the gains occurred on increased turnover in both exchanged. Total volume in the NYSE was 8% higher, while volume in the Nasdaq increased by 3% over the previous day’s level. This means that both the S&P and Nasdaq registered bullish “accumulation days.” Market internals were also bullish, as advancing volume exceeded declining volume by more than 4 to 1 in the Nasdaq and 3 to 1 in the NYSE. Since the Nasdaq has now had two consecutive “accumulation days,” it may be a sign that institutions are beginning to return to the markets. Confirmation of this would occur if we begin to see declining volume on subsequent down days.
Although the S&P had numerous days in October in which it trended to more than a 1% gain, yesterday was the first time the broad market followed through with two consecutive uptrending days. All the other significant “up” days last month were followed by reversals only one to two days later. The fact that the major indices managed two straight days of solid gains, combined with the accumulation days in the Nasdaq, is a positive sign for the bulls. However, the biggest factor that could put a damper on the bull party is the simple fact that each of the major indices still remain below resistance of their intermediate-term downtrend lines. In fact, those downtrend lines acted as resistance on several of the indices yesterday.
The S&P 500 firmly closed above its 200-day moving average yesterday, a resistance level that has plagued the index since it first closed below it on October 5. Obviously, it would be bullish if the index can hold above the 200-MA for more than a day or two, but both the 50-day MA and the S&P’s primary downtrend line may create a challenge. Looking at the daily chart of the S&P below, notice how the S&P 500 ran into resistance of both its 50-MA and primary downtrend line yesterday:
Similarly, the Dow backed off after testing resistance of both its intermediate-term downtrend line and its 200-day MA, the latter of which it has been trading below since October 3:
As you may recall, the Nasdaq has been in a primary downtrend for one month longer than both the S&P and Dow. It also remains well below resistance of its downtrend line that began with the high of August 3. The weekly chart of the Nasdaq below illustrates this relative weakness:
As the charts above illustrate, the major indices are key, pivotal levels right now. Whether or not the S&P, Dow, and Nasdaq can break out above their primary downtrend lines will be the determining factor for the broad market’s direction in November. We don’t care which direction the market goes, as we would simply be happy just to have a steady trend. But until we see a new uptrend develops or we see resumption of the primary downtrends, we are content to remain largely positioned in cash.
The Feds meet to discuss monetary policy today and will be announcing their decision on interest rates at the usual time of 2:15 pm EDT. As you are probably aware, interest rate announcements are usually followed by erratic and volatile market action, so you may wish to consider holding off one more day on any new trade entries. Giving the markets at least a day to digest the pending Fed comments before entering new trades will lower your risk of getting whipsawed in both directions. It will also give us more time to see how the major indices react to resistance of their primary downtrend lines, a test which is imminent.
There are no new trade setups for today, as we prefer to first see the market reaction to the upcoming Fed announcement on interest rates that is due later this afternoon.
Daily Performance Report:
Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:
Open positions (coming into today):
Closed positions (since last report):
SPY short (400 shares from Oct. 27 entry) –
shorted 119.08, covered 120.81, points = (1.73), net P/L = ($700)
Current equity exposure ($100,000 max. buying power):
GLD did not trigger and we have removed it from our watchlist. SPY stopped out. We are now flat the ETFs.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and