The most important thing to watch on the SPX

Stocks rebounded off the previous
day’s losses yesterday,
but resistance of the 1,280 level on the S&P
500 triggered a bit of selling in the broad market later in the afternoon. The
Nasdaq Composite
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gained 0.8%, as the small-cap Russell 2000 Index
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rallied 1.0%. The S&P 500
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recovered all of its previous day’s loss by
advancing 0.6%. Both the Dow Jones Industrial Average
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and the S&P
Midcap 400
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closed 0.7% higher. The gains were looking better at
mid-day, but the bears arrived on the scene in the final ninety minutes of
trading and sent the market lower. Each of the major indices finished near the
middle of their intraday ranges, pointing to a bit of indecision into today’s
session.

Perhaps the biggest positive of yesterday’s session is that
turnover rose slightly in both exchanges. Total volume in the NYSE increased by
6%, while volume in the Nasdaq was 5% higher than the previous day’s level. The
gains on higher volume made yesterday a bullish “accumulation day,” one of rare
days in which volume actually increased in sync with prices. However, many
leading stocks curiously traded inversely to the broad market and showed
relative weakness. Market internals were also positive, but not by a wide
margin. Advancing volume exceeded declining volume by a ratio of approximately 2
to 1 in both exchanges.

Over the past several days, we have focused most of our
analysis on specific industry sectors that have been showing relative strength
or weakness to the broad market. On the upside, we liked Gold & Silver,
Pharmaceuticals, and Utilities. On the downside, we liked just about every other
sector. Transports have been lagging the market, as have any stocks related to
technology. In yesterday’s session, the Gold & Silver Sector Index
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was
again one of the top performers, registering a solid 2.1% gain. As such, the
iShares Silver Trust
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rallied 3.5%, but the StreetTRACKS Gold Trust
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gained only 0.7%. Since our entry only two days ago, SLV is showing a
marked to market profit of nearly 7 points. We chose SLV over GLD because silver
was showing more relative strength than gold. This is easily identified by
comparing the daily chars of SLV and GLD below. Notice how SLV has already
broken out above its prior high from mid-July, but GLD is still below it:



Since we’ve spent a lot of time discussing the industry
sectors we like best, let’s take an updated look at the broad market today. The
most important thing to watch is the 1,280 resistance level on the S&P 500. In
yesterday’s session, the S&P probed above that level on an intraday basis, but
closed just below it. As the chart below illustrates, this is clearly a pivotal
area of resistance:



If the S&P can firmly close above the 1,280 level, it
would mandate an extra ounce of caution on the short side. But until that
happens, our bias does not change, especially considering the overall poor
performance of leading stocks over the past several days. The Nasdaq Composite
remains in much worse shape, as the index is not even close to breaking out
above its prior high from July 3. As short-term technical traders, we don’t have
subjective opinions on which direction stocks will go. Rather, we simply trade
in the same direction as the overall trends. It has been a bit choppy over the
past week, but the major indices still remain in primary downtrends. Until that
changes, it makes no sense to try to be a hero and call the bottom of the
market.


Open ETF positions:

Long SLV, LQD, short IWM (regular subscribers to

The Wagner Daily

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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
.