It’s time for the market to ‘make it or break it’
A positive reaction to the afternoon release of
the Fed minutes enabled stocks to shake off early weakness yesterday morning and
finish the day modestly higher. At mid-day, both the S&P 500 and NASDAQ
Composite were trading near their previous day’s lows and were off by 0.5% and
0.7% respectively. Volume was also coming in significantly higher, putting the
market on track for a bearish “distribution day.” Fortunately for the bulls,
that all changed when the Federal Reserve Board released their August minutes
that indicated they are through with the two-year pattern of raising interest
rates. The NASDAQ Composite reversed to a 0.5% gain, while both the S&P 500 and
Dow Jones Industrial Average finished 0.2% higher. The small-cap Russell 2000
showed relative strength for a change, as the index rallied 1.2%. The S&P Midcap
400 gained 0.5%. Because the Russell closed above its 200-day moving average, we
stopped out of our short position in the iShares Russell 2000
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average loss.
Analysis of yesterday’s volume pattern in the
broad market shows that a tug-of-war between the bulls and bears was taking
place. When the major indices were trading lower and at their worst intraday
levels, volume in the NYSE was on pace to be 15% higher than the previous day’s
level. Had stocks failed to reverse in the afternoon, the S&P 500 would have
suffered its first “distribution day,” indicative of institutional selling,
since August 9. Instead, stocks reversed course in the afternoon and volume
increased even more. By day’s end, total volume in the NYSE had increased by
20%, while volume in the NASDAQ was 17% higher. Since the broad market closed
higher, the volume surge enabled both the S&P 500 and NASDAQ Composite to
register bullish “accumulation days” instead. It was the second straight day of
higher volume gains in both exchanges, but we must once again point out that
turnover remained below average levels. We hate to keep harping on it, but broad
market moves in both directions should be taken in stride when minimal shares
are trading hands over such an extended period. We will, however, soon know the
true intentions of the “smart money,” as we expect volume levels to return to
normal after Monday’s Labor Day holiday has passed.
Yesterday’s gains caused both the S&P 500 and
NASDAQ Composite to finish at pivotal resistance levels of the highs of their
recent consolidations. Any further buying pressure in the broad market could
trigger the momentum necessary for both indices to break out above their
two-week ranges. Conversely, traders are also very adept at trapping the bulls
by selling into strength of probes above key resistance levels as well. Either
way, the good news is that we should soon see resolution and a confirmed move in
either direction out of the sideways range. It is time for the market to either
“make it or break it.” This is apparent on the daily chart of the S&P 500 SPDR
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The ever-popular NASDAQ 100 Tracking Stock
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similar pattern to the broader-based NASDAQ Composite. As with SPY, it is also
decision time for QQQQ (aka the “cubes”). However, note that the NASDAQ 100 (and
the Composite) has a lot more overhead supply to contend with:
Although we have had bearish ETF positions on the broad market lately, please be
assured that, like most professional traders, we really don’t care which
direction the stock market goes. Instead, we focus on consistently putting the
odds in our favor by simply trading in the direction of the primary trends. The
S&P and Dow broke out of their multi-month downtrends a few weeks ago, but the
NASDAQ remains below both its prior high from last month and its 200-day moving
average; hence the short positions in the Russell 2000 and S&P Midcap 400, both
of which tend to trade in sync with the NASDAQ. If all the major indices begin
to break out and higher volume confirms, you can be certain we will
quickly flip to the bullish side and focus on buying ETFs with the most relative
strength. But until that happens, we are avoiding entering new positions and are
focusing only on managing our existing ones. Consistently profitable traders
always trade what they see, not what they think!
Open ETF positions:
Long
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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.