Aided by continued strength in the U.S. dollar and another pullback in the price of crude oil, stocks raced higher yesterday, ignoring the prior afternoon’s weakness. Fueled by an impressive 3.9% gain in the Philadelphia Semiconductor Index ($SOX), the Nasdaq Composite rallied 2.8%. The S&P 500 gained 1.7% and the Dow Jones Industrial Average advanced 1.5%. The small-cap Russell 2000 climbed 1.9%, as the S&P Midcap 400 finished 1.3% higher. All the major indices closed at their intraday highs and above their respective highs of the previous day.
Total volume in the NYSE increased 3% above the previous day’s level, while volume in the Nasdaq ticked 10% higher. The broad market’s strong gains on higher volume caused both the S&P 500 and Nasdaq Composite to register a bullish “accumulation day,” counteracting Wednesday’s “distribution day” that pointed to institutional selling. It’s positive that trading in the Nasdaq swelled to its highest level since March 20, but turnover in the NYSE remained below its 50-day average level for the twenty-second consecutive day.
Given the numerous technical reasons discussed in yesterday morning’s commentary that the market could have been forming a near-term top, we were admittedly a bit surprised by the voracity of yesterday’s rally. But in the final paragraph of that commentary, we said of our newfound bearish bias, “Only a sudden, unexpected rally to close above yesterday’s [April 30] highs would cause us to change our minds, which we have no problem doing if the market proves us wrong.” Obviously, we were proven wrong, at least for now. Nevertheless, it wasn’t the first time the market fooled us, and it certainly won’t be the last!
Going into yesterday morning, we were stalking the UltraShort S&P 500 ProShares (SDS) for potential long entry above the previous day’s high. Immediately after the open, SDS traded a few cents above the previous day’s high, but not by a wide enough margin to trigger our buy entry. When dealing with precision levels of support or resistance, such as the previous day’s low or high, we always wait for the ETF to move beyond the pivotal level by at least 10 to 15 cents before entering the trade. This prevents falling victim to a “stop hunt” just a few pennies above or below the key area of resistance or support. In the case of SDS, it traded exactly eight cents above the April 30 high before reversing sharply lower. Fortunately, our buy trigger price was ten cents above the prior day’s high, so we did not get sucked in to SDS yesterday. From an educational perspective, this was a great example of the importance of giving your trade setups enough “wiggle room” to confirm themselves and not immediately jumping the gun when the ETF moves just a few pennies beyond resistance or support. At a minimum, we want an ETF or stock to move at least ten cents beyond the support or resistance before entering, though we’ll often use fifteen to twenty cents with more volatile issues.
With the main stock market indexes closing at their highest prices since January, there is no longer a good reward/risk ratio for most short sales at current levels. Conversely, however, there is one very legitimate concern with aggressively making new purchases here — resistance of the primary downtrend lines on the weekly charts. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average are each testing major resistance of their long-term downtrends that have been in place for the past seven months. The downtrend lines are annotated on the weekly charts of all three indices below (moving averages have been removed for better visibility of the key trendlines):
As you can see, the laggard S&P 500 is now kissing its weekly downtrend line, while both the Nasdaq Composite and Dow Jones Industrial Average have marginally moved beyond their downtrend lines. Does this mean the Nasdaq and Dow have broken out and are no longer in primary downtrends? Not necessarily. Quite frequently, indexes, stocks, and ETFs probe above resistance of their downtrend lines (or below support of their uptrend lines) before resuming their dominant trends. Such moves fool traders into thinking the trends have reversed, which has the effect of washing out the “weak hands” who are actually on the correct side of the dominant trend (down in this case). This, in turn, makes it easier for the dominant trends to resume after the trend traders have thrown up their hands in exasperation. In the current scenario, the dominant long-term downtrends may not resume until all the short sellers eventually give up and the bulls begin to feel complacent. The current probes above the weekly downtrend lines is probably starting to have that effect right now.
In addition to the downtrend lines shown above, notice that volume has been lighter throughout last month’s uptrend than during the sell-off that preceded it. This tells us institutional buying has been pretty minimal on the way up. Further, be aware that the main stock market indexes are quickly closing in on resistance of their 200-day moving averages (not shown on the weekly charts above). Rarely does an index breakout above or breakdown below a 200-day moving average on the first attempt. However, if the major indices somehow manage to blast through 200-day MAs and hold above them, the long-term bias will shift to neutral.
Lacking subjective opinion and calling it simply as the charts present themselves, this is still a countertrend bounce within the context of a dominant bear market. Nimble short-term traders can and should take advantage of the strength while it lasts, but please don’t be complacent! Because there are very real technical reasons why stocks could reverse at any time, tight, disciplined stops and quicker profit taking is the name of the game.
There are no new setups in the pre-market today. As always, we will promptly send an Intraday Trade Alert if/when we enter anything new.
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):
UUP long (1,300 shares from April 25 entry) – bought 22.68 (avg.), stop 22.27, target 23.72, unrealized points = + 0.12, unrealized P/L = + $156
Closed positions (since last report):
SLV long (150 shares from April 30 entry) – bought 166.49, sold 159.85, points = (6.64), net P/L = ($999)
Current equity exposure ($100,000 max. buying power):
After another large downside opening gap in SLV, we used the MTG Opening Gap Rules to manage the position, but the stop was subsequently hit. Both of our recent entries in SLV were made after SLV bounced off support of both its long-term weekly uptrend line and a major area of horizontal price support. But despite valid reasons for the entries, neither attempt worked. Now that SLV has broken support of its long-term weekly uptrend line and horizontal price resistance, we’re done messing with it. We fully believe in re-entering trades if the setups are still good, but we don’t believe in “revenge trading” just for the sake of being right. Moving on and looking for the next profitable opportunities. . .
Edited by Deron Wagner,
MTG Founder and