A late session surge carried stocks modestly higher on Friday. Friday marked the end of a third consecutive week that stocks have finished higher. The Dow Jones Industrial Average demonstrated the most strength yesterday, as it finished 0.6% higher. The S&P 500 and the small-cap Russell 2000 both posted 0.2% gains, while the Nasdaq and the S&P MidCap 400 both finished the session 0.1% higher.
Volume was substantially higher across the board on Friday, but much of the increase is likely attributable to options expiration. Big spikes in volume are common during options expiration. The Advancing Volume to Declining Volume Ratio was virtually at par on both the NYSE and the Nasdaq. Advancing volume was fractionally lower than declining volume on the NYSE, but fractionally higher than declining volume on the Nasdaq. For all practical purposes the ratio finished at 1 to 1 on both indices.
Given the recent run up in the market, and the fact that it has been almost two years since the market bottomed, we felt it was a good time to step back and evaluate the broad market. Below are charts of the SPDR S&P 500 ETF (NYSE:SPY), the Dow Jones Industrial Average (NYSE:DIA) and the Nasdaq (NASDAQ:QQQQ). From all appearances, the major indices may very well be reaching a reversal point. All three indices are not only approaching key Fibonacci resistance, but also the end of the predicted rally of failed head and shoulders patterns. Further, volume during this most recent move has been noticeably light. Although not presented on the charts, we may also be reaching the end of a Fibonacci time cycle. There are many other technical indicators that have recently been suggesting a correction is near.
It is our opinion that the market is probably reaching a reversal point and over the past month we have repeatedly suggested the need for caution. Nonetheless, our obligation as traders is to honor the trend until the market tells us otherwise. As we’ve commented in previous newsletters, “markets are neither rational nor irrationalthey just are”. What is irrational is to trade based on personal feelings about the market.
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]