What Wall Street Is Focused Today
After a choppy, range-bound session of lighter overall volume, the major
indices closed with mixed results yesterday. Both the S&P 500 and Nasdaq
Composite traded in narrow ranges, inside the previous day, and closed higher by
0.1% and 0.5% respectively. But the Dow Jones Industrial Average showed relative
weakness and fell 0.2%. Yesterday’s 0.4% gain in the Russell 2000 Small Cap
Index was largely responsible for the strength of the Nasdaq, but the S&P 400
Mid-Cap Index gained only 0.1%. The AMEX Biotech Index ($BTK) resumed its solid
uptrend with another 1.1% gain, which also pushed BBH (Biotech HOLDR) over the
$195 level and to nearly a 5-year closing high. The Semiconductor Index ($SOX)
was flat, but that enabled SMH (Semiconductor HOLDR) to continue its bullish,
narrow-range consolidation at the highs.
As we often see during choppy and indecisive trading sessions, volume was low
in both exchanges. Total volume in the NYSE market declined by 5%, while volume
in the Nasdaq came in 7% lighter than the previous day. Turnover in both
exchanges came in below average levels, which is common during the “summer
doldrums.” Note that volume in the Nasdaq has declined in three of the last four
days, but the index closed higher on the sole day of increased volume, and also
gained ground in two other sessions. The one “down” day of the last four was on
declining volume. Similarly, the S&P has closed higher in three of the last four
sessions, but with two of the “up” days occurring on higher volume. Again, the
cingular day of losses was on lighter volume. This detailed analysis tells we
have not yet seen any warning signs of institutional selling activity, which
would be marked by higher volume “down” days and lighter volume “up” days.
Overall, volume is drying up as the market continues to consolidate in a range,
which is typically bullish.
If you have been holding SMH since our initial entry was suggested back on
June 1, you’re sitting on a 7% gain, but you may be getting a bit bored with the
lack of action during the past two weeks. If so, it is important to realize that
the “boring” sideways action in SMH is actually quite bullish. Remember that
even the strongest stocks need to pause and catch their breath along the way,
and this occurs in one of two ways. The most common scenario is to have a price
retracement or “pullback” in the stock price. When this occurs, it usually
enables the price of the stock or ETF to drop down to support of a key moving
average or uptrend line, which in turn provides the necessary lift for the stock
to stage its next leg up. However, the other manner in which a stock or ETF
takes a rest is through a “correction by time.” This occurs when the issue
trades near its recent highs in a narrow, sideways range, which gives the moving
averages and uptrend lines a chance to rise up to meet the price of the stock or
ETF. Between the two scenarios, a “correction by time” is more bullish because
it indicates that the bulls are not interested in selling and taking their
profits into price strength. Instead, sideways price action merely indicates a
temporary lack of buying interest. As such, it only takes the slightest increase
in buying pressure to push the issue to new highs. As the daily chart below
illustrates, this is what is occurring in SMH right now:
Notice how the 20-day moving average, circled above, has been rising steadily
during the past two weeks while SMH has been trading sideways in a narrow range.
If this continues, the 20-day MA will soon meet the price of SMH, which should
subsequently push it to new highs. If and when that occurs, we will be looking
to sell half of our long position into strength near our first price target of
$38.85. We will then raise the stop to maximize profit on the remaining shares.
As for the broad-based indices and ETFs, yesterday’s action did little to
change the short-term support and resistance levels we have pointed out
recently. Continue to watch the same levels we outlined in yesterday’s Wagner
Daily, but more importantly, watch for a sharp increase in volume. As volume
has been declining for the past several days, we are likely to see a volume
spike within the next day or two. Of importance is the direction the market goes
when institutions step in and spur the increase in turnover. This will provide
us with the true intentions of the “big boys” in the short-term. In the
intermediate-term, the weekly charts look pretty solid (except for the Dow), but
a short-term correction would not be out of line.
Deron Wagner is the founder and
head trader of both the Morpheus Capital Hedge Fund and Morpheus Trading
Group (morpheustrading.com). Mr. Wagner recently
released his video course,
Sector Trading Strategies (Marketplace Books, June 2002) and is
co-author of
The Long-Term Day Trader (Career Press, April 2000) and
The After-Hours Trader (McGraw Hill, August 2000). Deron has appeared
on CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest
speaker at various trading and financial conferences around the world. To
learn more about Wagner’s daily trading newsletters, visit morpheustrading.com or send an e-mail
to
deron@morpheustrading.com.