Here’s the short setup for DJU

January 31, 2006
Deron Wagner

The major indices closed near unchanged levels yesterday, as the broad market lethargically drifted sideways in a very tight range. Both the S&P 500 and Nasdaq Composite finished 0.1% higher, while the Dow Jones Industrial Average lost 0.1%. Action in the small and mid-cap stocks was equally dull; the Russell 2000 Index lost 0.2% and the S&P 400 gained 0.2%. The S&P 500, which traded in an extremely narrow 4-point range, finished just above its intraday low, as did the other major indices. It appeared that most traders were stepping to the sidelines ahead of today’s Fed meeting, which is expected to result in another quarter-point interest rate hike.

Total volume in both the NYSE and Nasdaq fell by 19% yesterday, causing the broad market to register its second consecutive day of lower volume gains. Obviously, it is not very positive when stocks are advancing on lighter volume, but remember there were recently two bullish “accumulation days” that followed the January 20 selloff (January 24 and 26). Furthermore, despite the decline in turnover, volume levels still came in above their 50-day average levels in both exchanges. Market internals were positive in both exchanges, although the Nasdaq looked better under the surface. Advancing volume exceeded declining volume by nearly 2 to 1 in the Nasdaq, but advancing volume only marginally exceeded declining volume in the NYSE.

While many industries are near their 52-week highs and
trending steadily higher, the DJ Utilities Average (DJU) is one sector that is setting up on the short-side. Looking at its long-term weekly chart, notice how the index appears to have formed a “lower high” over the past several weeks:

If the DJU index fails to go any higher and subsequently sets a “lower low” on its weekly chart, below the December 2005 low, it will represent a primary trend reversal. To capitalize on this relative weakness, consider selling short a break of the shorter-term daily uptrend line. Take a look at the daily chart below (moving averages removed so you can more easily see the trendline):

Don’t forget that the Federal Reserve Board is meeting today and is widely expected to announce another quarter-point increase in the Fed Feds rate at 2:15 pm EST. Such a decision would be the fourteenth consecutive interest rate hike and would bring the current rate up to 4.5%. As usual, the actual wording of the announcement is irrelevant. Rather, the only thing that matters is the market’s reaction to the announcement. Expect the typical indecisive chop ahead of the afternoon Fed announcement, followed by high volatility in the final ninety minutes of trading. Because the broad market’s action after FOMC meetings is
unpredictable, use caution with entering new positions today and consider reducing your share size as well. We will take an updated look at the technical support and resistance levels in the major indices tomorrow, after the markets have had a chance to digest the Fed news. For now, keep an eye on resistance of the January 19 highs, which is where both the S&P and Nasdaq appear to be running into a bit of overhead supply.

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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron’s other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .

Here’s the short setup for DJU

BUY THE FEAR, SELL THE GREED

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