Commentary:
The broad market digested the previous day’s gains yesterday, as stocks consolidated near Wednesday’s highs. Each of the major indices finished near unchanged levels, a positive sign considering that stocks retained nearly all of their post-Fed gains. The S&P 500 was flat, the Dow Jones Industrial Average gained 0.1%, and the Nasdaq Composite slipped 0.2%. The small-cap Russell 2000 eked out a 0.1% gain, while the S&P Midcap 400 advanced 0.2%. Each of the major indices closed just above the middle of their intraday ranges, but yesterday’s ranges were relatively narrow anyway.
Total volume in the NYSE declined 1%, while volume in the Nasdaq was 8% lower than the previous day’s level. Lighter volume in consolidation days is healthy, as it indicates traders are not selling into strength. Rather, the bulls are just taking a rest. Market internals were negative in both exchanges, but not by a wide margin. Declining volume in the Nasdaq exceeded advancing volume by a ratio of 3 to 2, but the NYSE spread was negative by only 1.2 to 1.
The Oil Service Index ($OSX), which we pointed out as showing high relative strength last week, was again the biggest gainer of the major industry sectors. When the index broke out above a band of consolidation on March 19, we mentioned that Oil Service was likely to be among the leading sectors if the broad market strength continued. We also, however, cautioned against holding breakouts too long in the current market environment. The $OSX dipped back into its trading range the following day, but then quickly reversed and zoomed higher with the broad market. On the weekly chart, the Oil Service HOLDR (OIH) is now breaking out above a long-term downtrend line that has been in place since the high of May 2006. This sector should continue to be among the strongest in the intermediate-term:
If Wednesday’s rally was sustainable and perhaps the start of a new uptrend, then we should expect the 50-day moving averages in both the S&P 500 and Nasdaq Composite to act as support over the next week. After both indices broke out above their 50-day MAs on Wednesday, the prior resistance should now have become new support. The Nasdaq Composite successfully tested and rebounded off support of its 50-day MA yesterday. However, resistance from the gap of February 27 may be tough for the index to rally above anytime soon. The 20-day moving average remaining crossed below the 50-day moving average will also provide further resistance:
The S&P 500 has a similar chart pattern to the Nasdaq, except that it is further above its 50-day MA. The chart below illustrates support of the 50-day MA, as well as resistance of the February 27 high:
Of the “Big 3” major market indexes, the Dow is the only one that still remains below its pivotal 50-day MA. It ran into it the past two days, but has not yet been able to close above it. Because the Dow is only comprised of a limited basket of thirty blue-chip stocks, it technically is not a very accurate indicator of the overall stock market’s health. Nevertheless, both the general public and financial news media devotes a lot of attention to the daily performance of the Dow. As such, we can’t ignore the importance of whether or not the index is able to move back above its 50-day MA. Of all the major indices, the Dow appears to be the weakest link:
On a technical level, the charts are certainly looking much more bullish than they were just a few days ago. But don’t ignore the fact that a lot of overhead supply remains from the February 27 sell-off. When traders and investors suddenly get trapped in a volatile, unexpected move and don’t immediately cut their losses, overhead supply is created. If the market subsequently attempts to recover back to that level, the people who created the overhead supply sell into the strength of the rally, just in an attempt to “break-even.” Wednesday’s upward surge undoubtedly absorbed a lot of supply, but there is still quite a distance to cover before the wake of the February 27 sell-off is no longer a factor. It’s okay to dip a toe in the water of the long side of the market, just be prepared to run for cover if a tidal wave sets in.
Today’s Watchlist:
As per yesterday’s commentary, we want to avoid new trade entries for the next couple of days until the market confirms Wednesday’s action was not just a knee-jerk reaction to the Fed meeting. So far, the market is responding well. If that continues, we will begin looking for new long entries on ETFs that are breaking out of a base next week. OIH (Oil Service) on a pullback is one such ETF we are stalking. However, we cannot ignore the fact that a lot of overhead supply remains from the February 27 sell-off.
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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IYR short (275 shares from March 13 entry) – sold short 85.75, stop 88.69, target 78.30, unrealized points = (2.00), unrealized P/L = ($550)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $24,145
Notes:
No changes to the open position.
Edited by Deron Wagner,
MTG Founder and
Head Trader