Watch This Pivotal Level

The major indices broke out above their multi-week
sideways ranges last Thursday, but just as quickly fell back down
into their prior trading ranges on Friday. After trending lower throughout the
morning session, the broad market attempted to rebound at 2:00 pm EDT, but the
buying interest was short-lived and the indices drifted lower into the close.
The S&P 500 Index lost 0.8%, while both the Nasdaq Composite and Dow Jones
Industrial Average shed 0.6%. Each of the major indices closed near their
intraday lows and also gave back all of their previous day’s gains and then
some. Nevertheless, the broad market held up well throughout the last week of
July. The Nasdaq Composite’s 0.2% gain for the week enabled the index to
register an impressive 6.2% gain for the month. The S&P 500 gained less than
0.1% for the week, while the Dow was lower by the same percentage. Both indices
moved 3.6% higher in July.

One of the more positive elements of last Friday’s action was that total
market volume declined across the board. Volume in the NYSE and Nasdaq markets
declined by 13% and 7% respectively. The lighter overall volume levels prevented
Friday from becoming a bearish “distribution day,” which would have indicated
institutional selling. Instead, the losses were more the result of a lack of
buying interest rather than an abundance of selling. The pattern of higher
volume on a majority of the “up” days with lighter volume on the “down” days
continues to be intact. Both the Nasdaq Composite and S&P 500 have only seen two
days of institutional distribution within the past four weeks, which indicates
an overall healthy market “under the hood.”

In the July 28 issue of The Wagner Daily, we discussed how the
50-period moving average on the 60-minute chart often acts as a very reliable
short-term support/resistance level for swing traders, especially with a market
or stock that is trending steadily. Last Friday’s losses once again caused SPY
(S&P 500 Index Tracking Stock) to drift back down to support of the 50-MA on the
hourly chart. Looking at the hourly chart of SPY below, notice how the uptrend
line from the July 18 low (the ascending blue line) converges neatly with the
50-period moving average (the pink line). This is a pivotal level to watch going
into today’s session:

 

Because the 50-MA has been acting perfectly as support ever since July 18,
our overall short-term market bias remains positive as long as SPY (and the S&P
500) hold above that uptrend line and 50-MA. Remember also that an intraday
probe below the trendline or 50-MA does not count as a break of support.
Only a closing price below those levels would warrant a possible change
in our short-term broad market bias. Furthermore, there is a lot of support on
the daily chart, so it is not advisable for swing traders to blindly short SPY
even if the hourly chart begins to weaken. Specifically, note key support of the
20-day moving average is at $122.34, which also converges with support of the
July 26 low (circled on the daily chart below):

Looking at the daily charts of QQQQ (Nasdaq 100 Index) and DIA (Dow Jones
Industrial Average), resistance of the upper channel of their trading ranges has
now become the highs of last week. Both ETFs also have clearly defined areas of
horizontal price support as well. We have labeled these short-term areas of
support on the daily charts below:

 

Both the Semiconductor (SMH) and Biotech (BBH) HOLDRS have been consolidating
at their highs for the past two weeks. We netted a 15-point gain in our last BBH
trade that was closed on July 17, but it may soon be time to re-enter the
position again. We would ideally like to see a little more consolidation to
enable the 20-day moving average to rise up and provide support, but we are
nevertheless stalking BBH for a potential long entry on its next breakout over
the $194 area. As for SMH, we remain long with a 7% unrealized gain from our
June 1 entry and are patiently waiting for the next breakout to new highs. When
that occurs, we will trail the SMH protective stops higher. At the present time,
we do not see any industry sector ETFs that are short candidates with a positive
risk/reward ratio.

As a new member of the Trading Markets team, I will be posting an
abbreviated version of my daily newsletter, The Wagner Daily, which I have been
publishing since mid-2002. The Wagner Daily, which is posted each morning before
the market opens, focuses specifically on short and intermediate-term trading of
exchange traded funds (ETFs). Each issue begins with a technical recap of the
prior day’s broad market action, followed by a concise analysis of key support
and resistance levels of the broad-based indices and ETFs. Specific industry
sector ETFs are also targeted for entry as they present themselves. Regardless
of whether you are a day trader or swing trader, stock trader or ETF trader, the
commentary is geared towards quickly assisting you in identifying pivotal market
levels that are likely to affect your positions both in the short and long-term.

Note the abbreviated version that appears on the Trading Markets web site
includes the full text of my morning market analysis and commentary, but does
not include annotated charts of ETF trade setups that regular monthly
subscribers receive. Subscribers receive detailed entry prices, stop prices, and
price targets, as well as a daily summary of all open positions.
Click here to become
more familiar with the style of my writing by viewing actual past issues of The
Wagner Daily, which are updated on our web site weekly.

Deron Wagner