How professionals are playing this market

Just as the market gave us numerous
signals that is was safe to begin re-entering the short side,
the major indices suddenly reversed and closed the week with impressive gains
last Friday. After beginning the day with an opening gap up, stocks never looked
back, as most sectors trended steadily higher throughout the day. Both the S&P
500
(
SPX |
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News |
PowerRating) and Dow Jones Industrial Average
(
DJX |
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Chart |
News |
PowerRating) rocketed 1.7% higher,
but continued weakness in the Semiconductor Index
(
SOX |
Quote |
Chart |
News |
PowerRating) caused the Nasdaq
(
COMP |
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Chart |
News |
PowerRating)
to lag behind. Nevertheless, the Nasdaq still advanced 1.3%. Small and mid cap
stocks kept pace with the S&P, as the Russell 2000
(
RUT |
Quote |
Chart |
News |
PowerRating) gained 1.8% and the
S&P 400 Midcap Index
(
MDY |
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Chart |
News |
PowerRating) rallied 1.7%. Not surprisingly, relative weakness
was quite notable in the $SOX, as the sector broke key support of its 200-day
moving average the prior day. The $SOX was the only industry sector we follow
that closed in the red (down 0.7%). The S&P and Dow both broke their 3-week
losing streaks with gains of 1.6% and 1.8% respectively. The Nasdaq only managed
a 0.3% gain for the week.

Total volume in the NYSE decreased by 2% last Friday, but
volume in the Nasdaq came in 5% higher than the previous day’s level. Despite
showing relative weakness, the Nasdaq technically logged a bullish “accumulation
day” because it closed higher and on higher volume. This helped to
counter the prior “distribution days” from earlier in the week. Turnover in the
NYSE declined a bit, but was still near average levels. Market internals in the
NYSE were very strong, with advancing volume exceeding declining volume by a
margin of 5 to 1. The Nasdaq, however, was positive by less than 2 to 1.

If you’ve been having trouble staying with positions on
either side of the market lately, don’t feel bad. The market trended very
smoothly throughout the first half of October and we netted solid profits, but
the second half of the month has been extremely indecisive from one day to the
next. To illustrate this, take a look at the hourly chart of the roller coaster
ride known as the Dow Jones Industrial Average:

As you can see on the chart above, the past two weeks have
seen smooth and steady trends on an intraday basis, but the direction of those
trends has been changing from one day to the next. Hopefully you have been
following our advice to remain mostly in cash, which is always the best position
to have when the market becomes erratic. We have had a couple small losses from
“testing the waters” over the past two weeks, but we have retained the majority
of our profits from the beginning of the month.

As discussed in the October 28 issue of The Wagner Daily,
last Thursday’s action, combined with several “distribution days” earlier in the
week, gave us numerous signals that hinted at an end of the two-week chop and
resumption of the primary downtrends. But Friday’s bullish action invalidated
that analysis. Over the weekend, the financial media was attributing Friday’s
rally to the positive GDP number released before the open, which may or may not
have been a factor. Remember that professional traders don’t care about the
reason why the market does what it does; the only thing that matters to
traders is how they react to the market’s actions each day. So, how should
traders react in the coming week? Unfortunately, it seems like the wisest thing
may be to once again resume our neutral bias, as Friday’s action was too bullish
to continue favoring the short side of the market (at least in the short-term).
Conversely, an abundance of overhead supply and technical resistance of the
primary downtrend lines makes it tricky to blindly buy stocks and ETFs at
current levels.

The daily chart of the Dow Jones, as you might expect, is a
choppy, sloppy mess. The weekly chart of the Dow continues to show a break of
the primary weekly uptrend line from four weeks ago, but doing any type of
meaningful on the shorter-term daily chart would be a moot point. The same could
be said for the S&P 500, although the 200-day moving average is definitely a
major level to be aware of. From October 24 to 26, resistance of the 200-day MA
caused the S&P to reverse and sell off sharply on October 27. However, last
Friday’s rally caused the index to once again close right below the 200-MA.
Whether or not the S&P closes above it in the coming week is anyone’s guess, but
you should definitely be prepared for continued volatility around this level.
Like last week, the bulls and bears will probably resume their game of
tug-of-war near this level. Rather than cheering for the bulls or bears, we
prefer to sit on the sidelines and wait for the outcome. Doing so will make it
much easier to profit than merely guessing and risking the possibility of
churning our accounts. Looking at the daily chart, you will see that 1,200 is
the pivotal level to watch on the S&P today:

The Nasdaq Composite reversed to close back above its 200-day
MA last Friday, but it closed below the previous day’s high. Conversely, both
the S&P and Dow closed well above their respective highs of the previous day.
This means the Nasdaq is showing relative strength to the other indices and
should be avoided on the long side, despite trading above its 200-day MA. As
long as the $SOX remains weak, the Nasdaq isn’t going to rally much.

Now that earnings season is winding down, we may begin to see
an end of the erratic action that has plagued stocks since mid-October. However,
be aware of the Fed meeting on interest rates tomorrow, yet another factor that
could spur more volatility and indecision. As we always say, patient traders are
always rewarded in the long-term, so don’t be worried about missing a potential
move if you’re not in the markets right now. SPY short is the sole open position
we have right now, and we are quite pleased to have only one open position!
There will be plenty of time to get back in the markets after the
direction of the short-term trend becomes clear (the intermediate-term trend is
still down). Above all, always trade what you see, not
what you think!

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