Support lines for major averages – The Wagner Daily 
The Wagner Daily – October 20, 2010
Concise technical analysis and picks of the leading global ETFs
Commentary:
Stocks gapped down and fell sharply on Tuesday, with the major indices posting their worst trading day in just over two months. The markets were met with considerable selling pressure throughout session. However, there was bounce in the last 30 minutes of trading that prevented the markets from closing at the lows of the day. Tuesday’s action resulted in the largest daily drop since early August. Of the major indices, the small-cap Russell 2000 exhibited the most weakness, as it plummeted 16.0 points, or 2.3%. The tech-rich Nasdaq and the S&P MidCap 400 both shed 1.8% on the day. The S&P 500 slipped 19 points, or 1.6%, while the Dow Jones Industrial Average dropped 165 points, or 1.5%. As touched upon in October 19th newsletter, we viewed Apple (AAPL) as a stock to, “keep an eye on”, as it could very well affect the direction of the broad market. It is noteworthy that, as AAPL lost its footing in the afternoon session, the broad market followed its lead. As we have been discussing for several weeks, the financial sector has exhibited relative weakness to the market. It’s not surprising that this sector also contributed to the selling pressure yesterday. By example, Bank of America tumbled 4.4% on the day.
Volume increased substantially on both the NYSE and the Nasdaq. NYSE turnover was up 28%, while the Nasdaq saw a 29% increase in volume. On the NYSE, declining volume significantly outpaced advancing volume by a ratio of 9 to 1. The ratio on the Nasdaq was somewhat better, as declining volume was higher than advancing volume by a factor of 6 to 1. The high volume in today’s selloff, indicates selling pressure by major institutions, and would therefore be labeled a distribution day. But, one or two distribution days within a period of a few weeks can typically be absorbed by a healthy market. However, we do need to be prepared for a significant correction if we exceed three or four distribution days in this time period.
As presented in yesterday’s commentary, “The sudden shift from one day to another tells us we are dealing with a market that is apparently becoming increasingly indecisive. In and of itself, this does not mean traders should suddenly abandon the long side of the market. However, a healthy degree of overall caution and alertness with one’s trading operations should be considered right now. “If you have not already done so, this is a good time to consider raising your protective stops on winning long positions, so that a nice profit can be secured in the event of a sudden reversal.” Today’s market action is in line with the aforementioned.
In the event we are entering a “market correction”, now is a good time to review the major indices for levels of support and resistance. Further, it is time to identify ETFs that have demonstrated relative strength to the market, and look to buy them on a pullback to support. Most of the emerging market ETFs are potentially good candidates as “pullback entries”. The charts below provide our analysis of support levels on the Dow Jones Industrial Average, S&P 500 and Nasdaq. We will be monitoring these levels carefully, as they provide the information needed to detect a possible market reversal.
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: deron@morpheustrading.com.
DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter “The Company”) is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock’s actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter “The Newsletter”). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.
Charts created by TradeStation (tradestation.com).
© 2002-2010 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.
