To see the ‘big picture,’ try this

Disappointing earnings outlooks from
tech giants Dell Inc. and Broadcom Corp
. triggered a 4.8% slide in
the Semiconductor Index
(
SOX |
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last Friday, causing the broad market to
suffer another day of losses on higher volume. The Nasdaq Composite
(
COMP |
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PowerRating)

dropped 0.9%, the S&P 500
(
SPX |
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lost 0.7%, and the Dow Jones Industrial
Average
(
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closed 0.5% lower. As we have become accustomed to seeing on
weak days, small and mid-cap stocks again led the broad market to the downside.
The Russell 2000 slid 1.7% and the S&P Midcap 400 fell 1.5%. All of the losses
occurred in the first hour trading, as the major indices traded in a narrow,
sideways range throughout the remainder of the session. For the week, the S&P
500 gained 0.3%, but the Nasdaq lost 0.8%. After Wednesday’s sharp rally, all
the major indices were poised for substantial weekly gains, but those gains
evaporated in the following two days.

Total volume in the NYSE rose by 14%, while volume in the
Nasdaq was 13% higher than the previous day’s level. Part of the rise in
turnover was attributed to monthly options expiration day, but the broad-based
losses on higher volume still resulted in both the S&P and Nasdaq having another
bearish “distribution day” that indicated institutional selling. Last Thursday’s
losses on lighter volume was encouraging to the bulls, but Friday’s higher
volume losses tell us that mutual funds, hedge funds, and other institutions are
still in selling mode. Until we begin to see a pattern of declining volume on
the down days and higher volume on the up days, we must assume the market
remains unhealthy “under the hood.”

We generally focus on the daily charts of the major indices,
as chart patterns on that time frame are where most of our ETF trades are
focused. However, the longer-term weekly charts are important for showing the
“big picture” of what is really happening in the broad market. Since we usually
study the long-term charts at least once a week, let’s take an updated look at
the weekly charts of the major indices. Doing so will enable us to have a clear
picture of the intermediate to long-term trends. First, we’ll assess the weekly
chart of the Nasdaq Composite:



As you can see, the Nasdaq had its lowest weekly closing price
since the week ending May 13, 2005. More importantly, it closed right at the
intra-week low of the week ending October 14, 2005. This is represented by the
dashed horizontal line at the 2,025 price level. Keep a close eye on this price
level going into this week, as it is a very pivotal area of support. A solid
break below that intra-week low from last October would represent the first
major “lower low” since August of 2004. A subsequent “lower high” would
represent the formation of a new primary downtrend. If the 2,025 level is firmly
broken, the next major support is the low of April 2005, around the 1,900 area.
Conversely, if the October low holds as support, expect the Nasdaq to find major
overhead resistance at the 2,190 level, which is the prior high of the current
downtrend. Next, let’s analyze the weekly chart of the S&P 500:



After only a quick glance at the S&P chart, one immediately
notices how much better the S&P has been holding up than the Nasdaq. Unlike the
Nasdaq, which closed last week right at its intra-week low of October 2005, the
S&P is still well above its October low. The dashed horizontal line on the S&P
chart represents support of the prior highs from July through September 2005.
The S&P has been trying to hold above that level for the past seven weeks, but
it closed just below it last week. If the intra-week low from last month is
broken, the October low around 1,170 would become the downside target.

Comparing the charts of the S&P and Nasdaq, it quickly becomes
apparent that the Nasdaq has been showing a lot more relative weakness ever
since the selloff began. This, however, is typical because the Nasdaq generally
leads the S&P when in an uptrending market as well. The technology related
sectors are the weakest of all, but we expect the S&P and Dow to start playing
“catch up” to the relative weakness in the Nasdaq. Many sectors in the S&P have
more downside potential, and therefore a better risk/reward ratio, than the tech
sectors such as the Semis. We mentioned Transportation (IYT) in last Thursday’s
newsletter and we still feel that will be one of the next formerly
market-leading sectors to crack. We’ll be stalking IYT for a potential short
sale entry over the coming week. Conversely, the only thing we would touch on
the long side right now are some of the fixed-income ETFs such as the iShares
Corporate Bond Fund (LQD), which we bought on July 20.


Open ETF positions:

Long LQD (regular subscribers to

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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
.