Want an unbiased opinion? Check these charts

Despite another quarter-point rate increase by the
Feds Tuesday, the major indices traded in a tight and narrow range
before finishing the day slightly lower. Stocks briefly rallied as a knee-jerk
reaction to the announcement of the widely expected rate increase, but the broad
market quickly fell back into its prior intraday range. The S&P 500
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Nasdaq Composite
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0.3% lower. The S&P 400 Midcap Index
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unchanged, but the small cap Russell 2000 Index
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activity in most industry sectors was lethargic and uneventful, but that is
likely to change over the next few days after traders have had a chance to
digest Tuesday’s Fed meeting.

Turnover in yesterday’s session was mixed. Total volume in the NYSE declined
by 5%, but volume in the Nasdaq was 1% higher than the previous day’s level. The
higher volume losses in the Nasdaq technically made yesterday a “distribution
day,” though the session did not really have the feel of heavy institutional
selling and the volume increase was nominal. Remember also that the prior two
sessions in the Nasdaq were both bullish “accumulation days,” so those days
certainly counter-balanced yesterday’s distribution.

As detailed in Tuesday’s Wagner Daily, the major indices are now at
pivotal support/resistance levels that will “make or break” the direction of the
broad market in the month of November. Because stocks traded in a benign fashion
yesterday, the support and resistance levels we illustrated yesterday are still
valid, so keep an eye on those levels going into today’s session. Of importance,
notice that both the Dow Jones and Nasdaq Composite have been stalling at
resistance of their 50-day moving averages over the past two days. The downtrend
lines overhead provide further resistance. Rather than being redundant and
showing the broad market’s key support/resistance levels again, you may wish to
review the charts in yesterday’s newsletter instead.

As we mentioned last week, one major drag on the Nasdaq has been the recent
performance of the Semiconductor Index
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of its 200-day moving average on October 27 and has been trading below it ever
since. The sector attempted to recover back above its 200-MA on October 31, but
it was unable to do so. The Semis are a heavily weighted sector, so the Nasdaq
will rarely sustain an upside move without the $SOX leading the way. If you want
to know where the Nasdaq is headed, just follow the performance of the $SOX.
Unless the $SOX recovers back above its 200-MA, we would be very cautious on the
long side of the Nasdaq:

With the daily charts of the major indices showing a lot of indecision near
their pivotal support/resistance levels, it is useful to take an updated look at
the longer-term weekly charts instead. Although you cannot really base your day
to day entry and exit points on the weekly charts, they are useful for removing
the “noise” and choppy action that often accompanies daily charts. This, in
turn, will enable you to stay focused on the “big picture” of what is really
happening instead of getting sucked into the choppy, sloppy action on the daily
charts right now.

The daily chart of the Dow shows a steady downtrend since the high of
September, but the weekly chart actually shows the Dow in a less-steep downtrend
since the high of March 2005. This is a good example of how the weekly chart
removes the day-to-day noise and enables you to more clearly see what is really
happening:

Unlike the Dow, the Nasdaq has only been in a primary downtrend since the
high of August, but the weekly chart shows that the downtrend began with the
formation of a bearish double top (the horizontal blue line on the chart below).
The one positive is that last month may have marked a “higher low” in the Nasdaq,
but the downtrend line (the red line) may be a challenge to overcome:

As you can see, weekly charts help you to maintain a clear and unbiased
technical picture when the daily charts show nothing but erratic chop and
indecision. We like to use a top-down approach to analysis by first looking at
weekly charts in order to see the “big picture,” then drilling down to daily and
hourly charts to determine our entry and exit points. If you are presently in
any stocks or ETFs and would like to re-affirm whether or not you should still
be in them, consider checking out the weekly charts. Again, short-term “swing
traders” cannot use weekly charts to identify precision entry and exit points,
but they are very useful for making sure your shorter-term analysis is not being
over-ridden by the more significant weekly trend.

The market’s performance over the next week is likely to determine its
direction for the rest of the month. When the direction becomes clear, we will
re-position ourselves on the appropriate side of the market by either buying
sectors with relative strength or shorting those with relative weakness. But
until that happens, we patiently remain in cash, ready to strike at a moment’s
notice.

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