Why the Nasdaq will start a new uptrend

Counteracting the previous session’s “distribution day,” volume levels rose even higher yesterday, resulting in a bullish “accumulation day” in both indices. Strong institutional demand was confirmed by the fact that total volume in the Nasdaq rocketed 20% above the previous day’s level, while volume in the NYSE increased by 11%. Although the Nasdaq’s volume spike was impressive, the real kicker was the incredibly strong market internals. Advancing volume in the Nasdaq trampled declining volume by a whopping ratio of more than 6 to 1! The ratio in the NYSE was positive by nearly 4 to 1. Bullish market action is typically confirmed when advancing volume merely doubles the level of declining volume, so a 6 to 1 ratio clearly shows the buyers were in control and sellers were scarce.

In yesterday’s Wagner Daily, we warned against being complacent on the short side of the market, despite the ugliness of Tuesday afternoon’s selloff. Yesterday’s action was certainly proof that such caution was warranted. We heeded our own advice by promptly covering our short positions in
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PowerRating) immediately upon detecting the strength of yesterday’s market internals. Doing so enabled us to sustain only minimal losses in both positions instead of waiting for the original stops to be hit at higher levels. The relative weakness in both ETFs gave us valid reason for the original short entries, but it is important to promptly and objectively determine when you are wrong. For most professional traders, being consistently profitable is not a result of being right on the direction of most trades. Rather, long-term profitability comes from quickly cutting the losses when you are wrong, but letting the profits ride when you are correct. Such is the reason that our average winning trade has historically been 1.5 to 2 times the amount of the average losing trade.

While follow-through of a short-term trend in the S&P 500 certainly would have been nice, yesterday’s rally put the index right back in the middle of its two-week trading range. Once again, the S&P 500 reversed its reversal day, mirroring the action that occurred on March 21 and 22. On March 21, the S&P 500 demonstrated very negative action by failing a morning breakout of its trading range, then selling off sharply in the afternoon. However, the index promptly recovered that session’s loss on the following day. Such was the action of March 28 and 29. Looking at the hourly chart below, you will see why it has been difficult to stay with short-term positions on both the short and long side of the market:

In recent weeks, the one problem we have had with the daily chart breakouts in the S&P and Dow was that the Nasdaq was not confirming. However, the Nasdaq Composite finally broke out of its three-month sideways range and closed at a new high yesterday as well:

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