We need to see more volume on the up-days
A rebound in the tech arena helped the Nasdaq to snap
its three-week losing streak, but institutional buying interest was
once again suspiciously absent. The Semiconductor Index ($SOX), which has
dropped more than 25% since May 5, finally registered a solid bounce of 3% last
Friday and pulled the major indices along with it. The Nasdaq Composite rallied
1.9%, while the S&P 500 and Dow Jones Industrial Average gained 1.2% and 1.1%
respectively. The small-cap Russell 2000 advanced 2.1% and the S&P Midcap 400
closed 1.6% higher. Friday’s gains also enabled the indices to finish at their
highest levels of the week. The Nasdaq turned in a substantial weekly gain of
3.7% and the S&P 500 kept pace with a 3.1% advance.
Looking
purely at last week’s percentage gains in the market, one would understandably
assume that stocks have recently been performing well. However, one major
problem is that the market has yet to confirm its gains with higher volume. In
Friday’s session, total volume in the Nasdaq declined by 14%, while turnover in
the NYSE was 7% lighter than the previous day’s level. We don’t mean to keep
harping on it, but the lack of volume on the “up” days should be a primary area
of concern for the bulls. Within the past week, there have been two large gains
in the broad market. On July 24, the S&P 500 rallied 1.6%, then followed it up
with a 1.2% gain on July 28. However, volume declined on both days. This is of
paramount importance because the stock market has never reversed from a primary
downtrend without first having an “accumulation day,” defined by higher prices
and higher volume. With institutions accounting for more nearly 75% of
the market’s average daily volume, rallies simply cannot last if they are driven
purely by retail buying.
In the
July 28 issue of The
Wagner Daily, we mentioned that the $SOX index may be trying to put in a
bottom, but it was still below resistance of its primary downtrend line. Its
subsequent three percent gain later that day helped confirm our thought about a
short-term bottom, but also caused the index to close right at resistance of its
downtrend line. Going into today’s session, this is one index you want to pay
attention to. If the $SOX manages to break out above its multi-month downtrend
line, it will undoubtedly force the bears to cover their short positions. In
turn, it could lead to a broad-based rally that may finally generate a
substantial rise in turnover. Conversely, failure to break out above that
downtrend line could just as easily lead to a resumption of the primary trend.
Remember that the semiconductor index tends to lead the market in both
directions because it is so heavily weighted within the Nasdaq, which usually
leads the other indices. The updated chart of the $SOX below shows the close
proximity of the index to its primary downtrend line:
Last
week, our attention was also focused on key resistance of the 1,280 level in the
S&P 500. We mentioned that a breakout above that level would mark the first
significant “higher high” in the S&P since the downtrend began on May 10. Since
the index closed at 1,278 on Friday, odds are good that we will see a test of
that level within the next one to two days. On July 18, the S&P 500 set a
“higher low,” which was the first step at setting up the index to form a “higher
high.” The daily chart below illustrates Friday’s close just below the 1,280
resistance:
As
earnings season begins to wind down, we can look forward to technical patterns
being more likely to follow-through. Much of the volatility over the past two
weeks has been driven largely by knee-jerk reactions to earnings surprises, but
we will soon see the market’s real reaction to the raft of earnings that have
been released. For now, our bias remains bearish in the intermediate-term, but
neutral in the short-term. The major indices remain in a downtrend, plain and
simple. Until that changes and is confirmed by higher volume, we have no
reason to fight the trend. With last week’s attempt at a broad-based breakout,
this may not be the best time to initiate new short positions, but we certainly
would not aggressively begin buying stocks and ETFs either. If you feel the need
to be long the market, focus on sectors such as Pharmaceuticals, Utilities, and
Gold/Silver Mining, each of which have been showing decent relative strength.
Regular subscribers will see below that we are actually targeting one of the
mining ETFs for potential long entry today.
Long
(
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positions and detailed setup information on new ETF trade entry prices. Intraday
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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 .