Here Are First Sectors That Could Rally When The Market Bounces

August 29, 2005
Deron Wagner

Last Thursday’s broad market consolidation near the lows followed through to the downside on Friday, as each of the major indices continued to extend their recent downtrends. Both the S&P 500 and Nasdaq Composite slid 0.6%, while the Dow Jones Industrials lost 0.5%. Small and mid-cap stocks, which were top performers during the previous uptrend, showed the most relative weakness on Friday. The S&P 400 Midcap Index dropped 0.9% and the Russell 2000 plummeted 1.4%. The broad market attempted to rally ninety minutes before Friday’s close, but stocks were immediately met by the overhead supply of sellers. Each of the major indices closed at their intraday lows, as well as their lows of the week. The S&P 500 declined 1.2% for the week and the Dow Jones dropped 1.5%, but the Nasdaq Composite only lost 0.7%. However, the Nasdaq sustained its fourth consecutive week of losses.

Total volume in the NYSE increased by 8% last Friday, but volume in the Nasdaq came in 3% lighter than the previous day’s level. The rise in turnover combined with the losses caused both the S&P and Nasdaq to register another bearish “distribution day.” But it was positive that volume in the Nasdaq declined marginally. Within the past four weeks, both the S&P and Nasdaq have had four days of confirmed institutional selling, but there were many more days of bearish “churning” that results from higher volume without a significant gain in prices. “Churning” days, as we have mentioned in the past, often precede the more obvious “distribution days.”

In the August 25 issue of The Wagner Daily, we provided subscribers with a short setup in MDY, the ETF that tracks the S&P 400 Midcap Index. Half of the short position hit our trigger price for entry on on the 25th and the remaining half position triggered on the 26th. It would have been risky to short MDY prior to last week, but now it has fallen below its 50-day moving average after consolidating in a narrow range for six days. The daily chart of MDY below illustrates Friday’s break of support, as well as our profit target on the short position:

Not only did
(
MDY |
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PowerRating) break below its 50-day moving average, but it also closed Friday below the intraday low of August 18. The consolidation of the previous six days, along with the 50-day moving average, should now act as resistance on any rally attempt. As such, we now expect
(
MDY |
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PowerRating) to fall to its next major support of the July 7 low, around the 125.32 level, before attempting to bounce significantly. Below that, the next support is the June 27 low around 123.17. The dotted blue lines on the chart above illustrate the areas of horizontal price support. Our average price on the short position in
(
MDY |
Quote |
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PowerRating) is 128.40, which gives us a current profit buffer of nearly one point. Now we will simply continue trailing a stop lower to protect gains and maximize profits. As always, we will keep subscribers updated on changes as they are made.

Open ETF positions:

Short MDY and ICF (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)

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 Are First Sectors That Could Rally When The Market Bounces

BUY THE FEAR, SELL THE GREED

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