3 reasons to stay on the sidelines today

Roller coaster type day in the
markets as the major averages experienced major intraday swings in
either direction on the release of various economic and corporate data. Let’s
start at the beginning. Stirring up pre-market futures action at 8:30am EST, was
the release of PPI and Core PPI figures which both came in relatively benign,
indicating a lack of inflation which the market digested with a very small gap
up in the SPY, DIA and QQQQ. The morning trade was lackluster until about
11:30am EST (ironically, what should have been the start of the midday doldrums)
when search behemoth Yahoo!
(
YHOO |
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PowerRating) reported that “profits and sales this
quarter will be at the low end of its forecast because of slower advertising
demand in some industries.” That, coupled with news coming in from Asia about
the military coup in Thailand caused the markets to sell off quite hard taking
not only the $GIN (Goldman Sachs Internet Index) but other tech sectors and the
broad market noticeably lower. The weakness continued en masse until 1:30pm when
the market suddenly realized that crude oil was about to close on the NYMEX a
full $2.00 per barrel lower than yesterday’s close and lower than the prior
swing lows of $62.80 set on Friday. Although the ensuing afternoon advance was
not completely broad-based as the internets and semis remained relatively weak,
it was enough to bring the markets back relatively close to their opening
positions thus causing only minor damage to their closing numbers. The Dow
(
DJX |
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News |
PowerRating)
ended up off by 14.09 (-0.12%), the S&P
(
SPX |
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PowerRating) lost 2.87 (-0.22%), and the
Nasdaq Composite being the weakest, shed 13.38 (-0.60%).

Total volume in the NYSE was approximately flat, coming in
very close to Monday’s levels, while there was a small increase in total
turnover on the Nasdaq
(
COMP |
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Chart |
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PowerRating) on the heels of the strong panic selling in
the internets. Overall volume on the Nasdaq increased by 8%. Even with the
afternoon rally, market internals were not able to close positive with NYSE
breadth (relationship between advancing volume to declining volume) closing 1.8
to 1 negative, and 2.6 to 1 negative on the Nasdaq. Advance decline lines told a
similar story with declining stocks edging out advancers by a margin of 443 on
the NYSE at the close and almost 700 on the Nasdaq.

One interesting point to mention when looking at intraday
action yesterday is the way that bad news seems to hit markets right when they
are at technical pivots. Is it the technicals, or is it the news that moves
markets? The answer is both, of course. However, because the market is a
discounting mechanism, it seems to “know” news in advance and acts accordingly.
Lets look at an hourly chart of the SPY below to illustrate this interesting
phenomena.

In the 60 minute snapshot of the last few trading days in SPY
above, note how the 131.65 area was tested four times in three trading days
after the sharp rally of last week. As annotated by the red circled areas, you
can clearly see how that area was support each and every time that it was
tested. The main thing to note in this picture is the sheer number of times that
the support level was approached. It is quite rare in terms of technical
phenomena to be able to test a support level more than 3 times and not break it.
This is due to the simple fact that those on the “other side” of the trade are
eventually washed out leaving only those in the attacking camp. After such a
huge run of last week, coupled with the triple top which you can see at the
peaks in the photo above, it was imminent that the bears would win out on a
fifth test of that support level. Interesting how the YHOO news seemed to come
at just the “right” time. Although this event was by no means earth shattering,
and certainly was more of a knee-jerk reaction than a major shift acting as the
catalyst for a major downswing, its still an excellent educational example of
how technicals often lead news and are more often than not inextricably joined
at the hip. The most rewarding setups are very often where the technical and the
fundamental come together at the same time.

As we reported yesterday, the Fed will once again meet to
discuss interest rates today at 2:15pm EST. As the recently released CPI and PPI
figures are painting inflation as being currently tame, we expect no change in
the actual rate. However, as usual, the language that the Fed uses after the
fact to justify their decision and set the stage for further meetings, will be
foremost on everyone’s mind. As of this writing, ORCL just released results that
seem to be pleasing to the Street. An 800 lb. gorilla in the broker-dealer
family, Morgan Stanley and also big box retailer, Circuit City, will both
release quarterly results this morning before the open. These three corporate
events along with a majority of traders trying to stay on the sidelines ahead of
the Fed should be the fodder for an interesting day. As always, trade only what
you see, never what you think.

Open ETF positions:

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 .