Commentary:
Stocks posted a solid session of gains yesterday, but the light volume once again lacked the power of institutional accumulation. The S&P 500 advanced 1.1% and the Dow Jones Industrial Average rallied 1.0%, but relative weakness in the semiconductor sector caused the Nasdaq Composite to lag slightly behind with a 0.9% gain. The small-cap Russell 2000 and S&P Midcap 400 indices both closed 1.1% higher. Both the S&P and Dow closed near their intraday highs, while the Nasdaq finished just above the middle of its intraday range.
Although yesterday’s gains were impressive, it was the same old story of lighter volume “up” days that we have been seeing since the broad market’s downtrend began on February 27. Total volume in the NYSE fell 30%, while volume in the Nasdaq was 19% lighter than the previous day’s level. Granted, the previous session’s volume swelled more than usual due to the “quadruple witching” expiration of options. However, yesterday’s turnover was still well below average levels. Both exchanges registered their second lowest volume days of the calendar year. Since the February sell-off began, the S&P and Nasdaq have each had only one day of higher volume gains. Conversely, many of the “down” days continue to coincide with higher volume. Last Friday was the most recent such “distribution day.” Until stocks begin to see signs of institutional buying, we just can’t trust the market’s current rally attempt off the March lows. Market internals were quite positive in the NYSE, but not too strong in the Nasdaq. Advancing volume in the NYSE exceeded declining volume by a margin of more than 5 to 1, but the Nasdaq ratio was only positive by 3 to 2.
In yesterday’s newsletter, we illustrated how the relative strength in the Oil Service Index ($OSX) should enable the sector to break out on any further strength in the market. Sure enough, that is exactly what happened. Of all the major industry sectors we follow, the $OSX scored the biggest gain yesterday, surging 2.8% higher:
Because higher volume has not yet confirmed the market’s rally off the March lows, we are not very confident the $OSX will go much higher in the short-term. Nevertheless, yesterday’s breakout was a good educational example of how stocks and sectors with relative strength to the S&P and/or Nasdaq typically outperform the major indices when the general market moves higher. Remember that anything that does not move lower when the broad market sells-off is usually the first thing to surge higher when the S&P and/or Nasdaq eventually bounces. Obviously, the inverse of that statement is true regarding stocks and sectors with relative weakness.
The S&P, Nasdaq, and Dow are now facing the “moment of truth,” as they have each approached resistance of their 20-day moving averages. Further, their 20-day MAs are converging with resistance of their respective March highs. Last week, we illustrated how overhead resistance of the 20-day MAs triggered a resumption of the downtrend, and a subsequent breakdown to new lows, during the broad market’s correction from May – July 2006. We shall soon see if history repeats itself this time around. We have pointed out resistance of the descending 20-day MAs on the daily charts of the S&P, Nasdaq, and Dow below:
The Federal Reserve Board begins a two-day meeting on economic policy today that will conclude with an announcement on interest rates tomorrow afternoon. Virtually nobody is expecting an actual change in interest rates, but traders will be highly anticipating any changes in their stance going forward. The recent news of sub-prime mortgage problems combined with fears of a possible slowing in the economy could result in a more volatile reaction to tomorrow’s FOMC announcement than usual. Stay alert and remember to trade what you see, not what you think!
Today’s Watchlist:
There are no new setups for today, as we are near the maximum buying power of the $50,000 model account. Instead, we will focus on managing open positions for maximum profitability.
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:
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Open positions (coming into today):
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SDS long (400 shares – 300 from March 1 entry , 100 added on March 7) –
bought 60.51 (avg.), stop 59.78, target 64.18, unrealized points = (0.38), unrealized P/L = + $152
RTH short (300 shares from March 19 entry) –
sold short 100.61, stop 102.98, target 96.70, unrealized points = (0.07), unrealized P/L = ($21)
IYR short (275 shares from March 13 entry) – sold short 85.75, stop 88.69, target 78.30, unrealized points = (0.57), unrealized P/L = ($157)
TWM long (250 shares from March 7 entry) – bought 71.94, stop 69.35, target 78.18, unrealized points = (2.19), unrealized P/L = ($548)
Closed positions (since last report):
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UTH short (200 shares – 100 from March 5 entry, 100 added on March 9) –
sold short 133.62 (avg.), covered 136.70, points = (3.08), net P/L = ($620)
Current equity exposure ($100,000 max. buying power):
- $95,431
Notes:
UTH stopped out yesterday, but we subsequently entered a new position in RTH short. RTH is a low-risk entry point due to a rally into the primary downtrend line, with both the 20 and 50-day MAs as overhead resistance.
Edited by Deron Wagner,
MTG Founder and
Head Trader