If this happens, it’s bullish

For the first time in
weeks,
stocks demonstrated bullish intraday trading action by gapping
lower on the open, but reversing to close in positive territory. Just as they
led the market lower throughout the downtrend, small caps also led the market
higher in sync with yesterday’s uptrend. The Russell 2000 Index advanced 1.1%,
while both the Nasdaq Composite
(
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and S&P Midcap 400
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indices
gained 0.7%. The Dow Jones Industrial Average
(
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rallied 0.4%, but the
S&P 500 showed relative weakness for a change and only gained 0.1%. A bit of
weakness in the final thirty minutes of trading caused the major indices to
finish off their highs, but still within the upper third of their respective
intraday ranges.

Turnover rose in both exchanges for the second
consecutive day, indicating a gradually increasing buying interest by
institutional traders. Total volume in both the NYSE and Nasdaq came in 3%
higher than the previous day’s levels. Volume in the NYSE came in just above its
50-day average level, but the Nasdaq turnover level was lighter than average,
despite the “accumulation day.” Once again, advancing volume only marginally
exceeded declining volume in both exchanges. Higher volume on an “up” day is a
good start, but it would be nice to see volume levels exceed their 50-day moving
averages.

Leading stocks acted better today, a positive
sign for the overall market, but the biggest technical problem facing the market
continues to be the S&P 500’s resistance at the 1,280 level. This area of
resistance, which we annotated in yesterday’s Wagner Daily, stopped the
rally dead in its tracks today. As the daily chart below illustrates, the S&P
500 briefly probed above the 1,280 level on an intraday basis, but failed to
close above it. Again, this remains the pivotal area of resistance on the S&P as
we enter the new month:



One of the biggest factors behind yesterday’s
market strength was the 1.5% gain in the Semiconductor Index
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. The $SOX
had been lagging for many months, but yesterday’s strength pushed the sector
above primary resistance of its downtrend line:



Obviously, it would be very bullish for the broad
market if the $SOX holds above its 50-day MA. However, take it easy with new
long positions until the S&P 500 also confirms the breakout above the 1,280
level. Just as many false breakdowns cause a lot of pain to the bears in a
strong market, there are an equal number of false breakouts that occur in
downtrending markets and often result in loss of capital for the bulls. We are
presently focused on managing our existing positions for maximum profitability
rather than entering new ones.


Open ETF positions:

Long SLV, LQD, short IWM (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
.