Make it–or break it

Stocks sold off in the first hour
of trading
, then chopped around in a sideways to lower range
throughout the rest of the session. The Nasdaq Composite
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0.9%, while both the S&P 500 and Dow Jones Industrial Average
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0.5%. The S&P Midcap 400 Index declined by 0.6% and the small-cap Russell
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fell 0.4%. The major indices have now given back a majority
of their gains from yesterday’s intraday low to high. Stocks did the same in
the two subsequent sessions that followed the June 15 rally. When markets
give back a majority of their gains immediately after such high percentage
gains are registered, it is typically caused by institutional selling into
strength. This is also typical action of a bearish market.

Counteracting yesterday’s negative action is the fact that
stocks fell on lighter volume. Total volume in the NYSE declined by 12%,
while volume in the Nasdaq was 11% lower than the previous day’s level.
Overall price action in the market may remain unimpressive, but the market
has been acting better “under the hood.” Of the last four days, there have
been three “down” days and one “up” day. However, all three “down” days
occurred on lighter volume, while the singular “up” day was on higher
volume. Granted, turnover was below average levels, but was still higher
than it was during the previous day’s losses.

The chart patterns of the major indices on their daily
charts indicates we are once again at a pivotal “make it or break it” point.
Both the S&P 500 and Nasdaq Composite are coming into resistance of their
six-week downtrend lines that we have been closely following, and we should
soon expect to see a swift move in either direction:

If either index above breaks out above its downtrend line,
it will likely generate momentum resulting from both short covering and
traders who are playing the bounce on the long side. However, the
probability is greater that the downtrend lines will result in another wave
down to at least test the June 14 lows. The probability of the latter
scenario is greater simply because we have been in a downtrend since the
middle of May. Stocks continue to follow the path of least resistance until
an external force causes a sudden shift in sentiment, but we have not yet
seen such an occurrence. Rather, we have only seen unsustainable technical
bounces off the lows.

Going into today’s session, we remain in “wait and see”
mode regarding our bias on the intermediate-term direction of the market. As
discussed above, the market should soon resolve itself by either breaking
out above resistance or resuming its primary downtrend, but take it easy
until either one of those situations occur. If you’re already in the market
instead of waiting in cash, it’s a good idea to be simultaneously positioned
on both sides of the market so that you are prepared for a rapid move in
either direction. We currently have three open ETF positions: one short (IYT)
and two long (TTH and GLD). If the S&P breaks out to the upside, we can
quickly cover the short position for a minimal loss, while we can just as
easily sell our long positions if the downtrend resumes. Of the two long
positions, one of them follows the price of spot gold (GLD), so it is not
even tied to the direction of the overall stock market.

Open ETF positions:

Long TTH and GLD, short IYT (regular subscribers to

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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and
founder of Morpheus Trading Group (,
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
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