We Anticipate The Current Rally Could Stall When The S&P Overcuts 1,370 (DIA, QQQ, IWM, SPY, DIG)

Stocks closed mostly flat on Tuesday on brisk trade. The Dow Jones Industrial Average (NYSEArca:DIA) and the Nasdaq (NASDAQ:QQQ) closed fractionally higher, while the S&P 500 (NYSEArca:SPY) and S&P MidCap 400 both slid 0.1%. The small-cap Russell 2000 (NYSEArca:IWM) put in the worst performance as it slid 0.5%. The top performing sectors included retail, computer hardware and oil services. Sectors suffering the most damage included banking, coal, steel, transportation, real estate and precious metals.

The session ended with market internals mixed. Volume skyrocketed on the Nasdaq by 31.9% while the NYSE saw a 8.6% increase in trade. Declining volume outpaced advancing volume on the NYSE by a ratio of 1.8 to 1. However, on the Nasdaq, advancing volume ended the session at par with declining volume. Although price action was flat yesterday, the late day recovery was impressive and showed all the characteristics of an accumulation day. Technically, yesterday would not be classified as an accumulation day but the action was clearly bullish.

Last week we discussed the key resistance levels on the Nasdaq and the S&P 500. Since then, not much has changed, but given the price discussion that has been occurring between bulls and bears over the past week, it is probably a good time to once again review the state of the broad market. Below are monthly charts of the Nasdaq and S&P 500. Notice that the S&P is now within about 20 points of resistance at the previous swing high. As we stated last week, we anticipate that the current rally could stall when the S&P overcuts 1,370.

Over the past two days, the ProShares Ultra Oil & Gas ETF (NYSEArca:DIG) tested support of its 10-day MA, but on both occasions reversed to close near session highs. A breakout above yesterday’s high of $49.62 could provide a buy entry trigger for this ETF.

The market came close to putting in a distribution day but a late session rally reversed the day’s fortunes. The fact that the market was able to reverse its trend late in the session, on a high volume day, suggests the bullish conviction in the market is quite high.

The commentary above is an abbreviated version of our daily ETF trading newsletter,
The Wagner Daily. Subscribers to the full version receive specific ETF trade setups with detailed trigger, stop, and target prices, as well as daily updates on all open positions. Intraday Trade Alerts are also sent via e-mail and/or text message, on as-needed basis. For your free 1-month trial to the full version of The Wagner Daily, or to learn about our other services, please visit morpheustrading.com.

Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also 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. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to: [email protected]

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