Trading the Nasdaq? Here’s what you need to know

A weak earnings report from Microsoft
after the previous day’s close
caused the
Nasdaq
(
COMP |
Quote |
Chart |
News |
PowerRating)
  to fall last Friday, but most of the major indices
still finished higher. After gapping down to start the day one percent lower,
the Nasdaq Composite attempted to reverse and “fill the gap,” but the rally
attempt fizzled after the first hour. This caused the index to drift back down
to its opening low and post a 1% loss by day’s end. Conversely, small and
mid-cap stocks held up well. Both the Russell 2000
(
RUT |
Quote |
Chart |
News |
PowerRating)
and S&P Midcap 400
(
MDY |
Quote |
Chart |
News |
PowerRating)
indices finished 0.4% higher. The S&P 500
(
SPX |
Quote |
Chart |
News |
PowerRating)
managed a 0.1%
gain, but the Dow Jones Industrials slipped lower by the same percentage. For
the week, the S&P 500 lost less than 0.1%, but the Nasdaq Composite dropped
0.9%. In the full month of April, the divergence between the two indices was
even greater. The S&P 500 gained 1.2% while the Nasdaq shed 0.7%. When the major
indices are out of sync with each other, it usually results in choppy and
erratic trading that lacks momentum. Certainly, that is a good way to describe
April’s price action (and March’s too for that matter).

Helping ease the blow of Friday’s loss in the Nasdaq was that
total volume in the exchange came in 3% lighter than the previous day’s level.
The drop in turnover prevented the tech-heavy index from registering another
“distribution day,” which would have indicated institutional selling. Volume in
the NYSE declined by 14%. Not surprisingly, market internals were mixed
alongside the major indices. In the NYSE, advancing volume exceeded declining
volume by a margin of just under 3 to 2, but the ratio in the Nasdaq was
negative
by nearly 5 to 2. Still, that Nasdaq’s advancing/declining volume
ratio was not overly bearish considering the 1% drop in the index. Because
Microsoft is the most heavily weighted stock in the Nasdaq, its 11% decline on
Friday was solely responsible for much of the Nasdaq’s loss.

Underneath a relatively flat S&P, a handful of industry
sectors made substantial moves last Friday. A new 25-year high in the price of
spot gold enabled the StreetTRACKS Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating)
to rally 3.4% and break
out to a new high as well. The April 20 correction in gold and the gold mining
stocks was short-lived and is a good example of how stocks and ETFs at new highs
can easily continue much higher simply due to a lack of overhead supply. So far,
the strength in the gold sector shows no signs of abating any time soon (and
don’t forget about the new silver ETF, SLV):



Last Thursday’s breakout in the Banking Index
(
BKX |
Quote |
Chart |
News |
PowerRating)
that
we brought to your attention in the April 28 issue of

The Wagner Daily

continued higher on Friday. The $BKX index gained 1.9%, enabling the Regional
Bank HOLDR
(
RKH |
Quote |
Chart |
News |
PowerRating)
and the S&P Select Financial SPDR (XLF) to move higher by
1.8% and 1.0% respectively. It’s nice to see that both of these ETFs not only
held on to their gains, but continued higher in Friday’s session. With the
exception of oil and gold-related ETFs, nearly every sector over the past month
has whipped in the opposite direction the day following a substantial move. The
Oil and Oil Service sectors are currently in correction mode, so perhaps we will
see further sector rotation out of oil and into the banking sector. We are now
stalking the banking ETFs for a long entry on the first correction, which may
occur in the form of either a price retracement or a correction by time
(consolidation). In RKH, the prior high around 149 should now act as firm
support, although we probably will not see a correction all the way back down to
the breakout level. A Fibonacci retracement of 38.2% to 50% from the breakout
level will provide a low-risk entry point on the long side:



In the

April 20 issue of
The Wagner
Daily
, we pointed out a bullish setup in the iShares Mexico ETF
(
EWW |
Quote |
Chart |
News |
PowerRating)
.
At the time, it was poised to break out to a new high from a four-month base of
consolidation. We subsequently bought EWW the following day when it traded above
the high, but we scratched the trade the following day because the lack of
immediate follow-through put the setup in jeopardy of being a false breakout.
However, EWW has been acting much better since then and closed last week at a
new record high. We bought a small position in our hedge fund on Friday, but did
not make it an “official” call yet because we first wanted to see a little more
price confirmation. Nevertheless, you might consider buying EWW now that it
finally had a weekly close above the four-month trading range. Despite the
breakout, we are still using a tight stop just below the 20-day moving average
on this play:



As for the major indices, nothing has substantially changed
since our last analysis of the S&P and Nasdaq. For the S&P 500, the 1,310 level
remains a key area of resistance that the index has failed to hold above on
numerous occasions over the past seven weeks. Until it convincingly breaks out
of that range, we must remain cautious with new long positions. The relative
weakness in the Nasdaq provides further reason to reduce your share size and
quantity of positions on the long side. Yet, the Nasdaq remains in a choppy,
sloppy trading range as well. Keep an eye on the 2,312 level, ten points below
last Friday’s close, as that represents support of the 50-day moving average. A
break below that could trigger a wave of downside momentum, particularly in the
tech arena. As short-term trend traders, we would be equally fine with a
breakout to new highs or a breakdown below support, as either one should
result in the development of a new trend. But as it has been for the past two
months, steady trends remain few and far between, continuing to challenge both
short-term momentum and trend traders.


Open ETF positions:

Short IYR (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
.