Watch these key levels in the SPY

The broad market followed-up
Tuesday’s break of support in the S&P 500

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with a modest bounce yesterday, but the recovery attempt lacked power. The Dow
Jones Industrial Average
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advanced 0.4% and the Nasdaq Composite
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closed 0.2% higher, but the S&P 500 only managed a 0.1% gain. The small-cap
Russell 2000 rallied 0.8%, while the S&P Midcap 400 {MDY|MDY] gained 0.3%. All
of the major indices’ gains were the result of minor strength on the open, after
which stocks traded in a very narrow, sideways range throughout the entire day.

Although the market temporarily put the brakes on Tuesday’s
slide, much lower volume levels showed that yesterday’s rally lacked
institutional buying interest. Total volume in the NYSE declined by 15%, while
volume in the Nasdaq was 27% lower than the previous day’s level. Considering
that volume surged in the prior day’s selloff, it would have been positive if
turnover increased even more to match yesterday’s gains, but that wasn’t to be.
Part of the reason for the lackluster trading activity could have been tied to
the Jewish holiday of Passover, which began last evening. With the markets
closed for the Good Friday holiday tomorrow, it’s possible that stocks will
remain in a holding pattern until next week. Wall Street often cuts out early
ahead of three-day holiday weekends.

Overall, yesterday’s minimal gains did little to change the
current technical picture of the broad market. Given that the Nasdaq Composite
lost 2.2% in three straight down days from April 7 through 11, it was not
surprising to see a small upside correction yesterday. Even the Russell’s 0.8%
gain was not surprising considering that the index had dropped 3.1% over the
course of the three prior days. If anything, we view yesterday’s bounce as a
chance to non-aggressively sell short the broad-based ETFs if you missed
the first drop. If the April 11 lows are subsequently broken, we would feel more
comfortable about adding to any short positions.

As for stops on any broad-based short positions, consider

Fibonacci retracement levels
because the downtrends since the April 7 highs
have been pretty smooth. As of now, each of the major indices remain well below
even the first major Fibonacci retracement level of 38.2%, which would indicate
the short-term downtrend is presently in no danger of reversing. Using
Fibonacci, you could place your stops just above the 61.8% retracement levels,
as a rally above that level often completely reverses a downtrend. With SPY (S&P
500 SPDR), for example, you can see that it remains well below its 61.8%
retracement of the downtrend:

Because we expect another session of light turnover today,
we’ll wait until the beginning of next week to take an updated look at the daily
charts of the major indices. Based on the current situation, our near-term bias
remains cautiously bearish due to the S&P’s failed breakout from a four-week
consolidation and a drop below its six-month uptrend line. But the big question
is whether or not the S&P 500, and a handful of other indices, will hold at
support of its 50-day moving average this time around..

NOTE: The U.S. stock markets will be closed tomorrow due to
the Good Friday holiday. As such, The Wagner Daily will not be published
tomorrow, but regular publication will resume on Monday, April 17. Have a safe
and enjoyable holiday weekend!

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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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