Here’s how I’m trading the Nasdaq

  • January 25, 2006
  • Deron Wagner

Yesterday was a repeat of the previous day’s action, as the broad market drifted in a narrow, sideways range before finishing the day modestly higher. One positive difference, however, is that turnover correspondingly rose as well. Both the S&P 500 and Dow Jones Industrials gained 0.2% for the second consecutive day, but this time the Nasdaq Composite turned in a much better performance with a 0.7% advance. Small caps continued to display impressive relative strength, as the Russell 2000 cruised 1.4% higher and closed at a new record high. The mid-cap S&P 400 also outperformed with a 0.9% gain yesterday. Interestingly, small and mid cap stocks were virtually unaffected by last Friday’s sharp drop in the S&P 500, Dow, and Nasdaq, which is the reason we cautioned against shorting
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Total volume in the NYSE increased by 11% yesterday, while volume in the Nasdaq was 8% higher than the previous day’s level. The increase in turnover tells us institutions were nibbling on the buy side, but it would have been better to see larger percentage gains considering the extent of last Friday’s losses. Market internals were also not very strong. Advancing volume in the Nasdaq exceeded declining volume by a narrow margin of only 3 to 2. The key question is whether or not we will see another surge in volume on the next “down” day in the market. Remember how the positive effect of the January 19th “accumulation day” was quickly wiped out by the much higher volume losses the following day.

Over the past two days, both the S&P 500 and Nasdaq Composite have been clinging to life support of their 50-day moving averages. As we are “supposed” to see in primary uptrends, both indices bounced after coming down to support of their 50-day MAs on January 20. But in actuality, the bounces have been pretty lame thus far. The S&P 500, for example, appears to be hanging on the edge of a cliff.

The small retracement of the past two days that followed the January 20 selloff has created a “bear flag” chart pattern. Therefore, if the S&P 500 falls below yesterday’s low, it would provide an ideal short entry in SPY due to a break of both the 50-day moving average and short-term hourly uptrend line. As such, we are stalking SPY for a potential short entry today (regular subscribers can note our trigger, stop, and target prices below).

Looking very similar to the S&P 500 is the daily chart of the Nasdaq Composite:

If interested in shorting the Nasdaq,
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ONEQ |
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Overall, both the S&P and Nasdaq are at key pivotal levels and are likely to make a big move in one direction or the other within the next few days. Based on the very bearish action and technical damage of January 20, we feel odds tend to favor a move to the downside, but relative strength in the small and mid cap stocks may pull the market higher instead. Either way, be sure to honor your stops on both sides of the market and
 trade what you see, not what you think!

Open ETF positions:

Long
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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.