After oscillating in a choppy range throughout most of the day, the broad market made a late-day push that enabled the major indices to finish last Friday’s session substantially higher. Both the S&P 500 and Nasdaq Composite rose 0.7%, while the Dow Jones Industrial Average advanced 0.6%. The small-cap Russell 2000 and S&P Midcap 400 indices gained 0.5% and 0.9% respectively. All the main stock market indexes closed at their best levels of the day, week, month, and year. It was the sixth consecutive week of gains in the broad-based market indexes.
Total volume in the NYSE eased 8%, while volume in the Nasdaq was 10% lighter than the previous day’s level. It was the second consecutive day stocks gained on lighter volume, which also followed the April 7 “distribution day” (losses on higher turnover). Gains on faster trade would have been more convincing, as it would have indicated the presence of institutional buying. Instead, the broad market advance of the past two days was merely the result of a lack of selling, rather than the presence of heavy buying. Just as water flowing down a hill will follow the path of least resistance, the same is true of the stock market. We monitor institutional trading activity on a daily basis because mutual funds, hedge funds, and other institutions typically account for more than half of the market’s average daily volume.
Despite a bit of mid-week distribution last week (higher volume selling), the major indices scored another round of gains, setting fresh 52-week highs in the process. Since February, the rate of gain has been moderately stable; there have only been two modest pullbacks along the way. Nevertheless, the current rally has brought prices of many ETFs, and several of the major indices, back to substantial levels of price resistance from 2008. These areas of major technical price resistance may cause prices to momentarily stall until overhead supply is absorbed. Although the resistance levels are from two years ago, “buy and hold” investors may be tempted into lightening up on their holdings they failed to sell during the plunge. Using the broad-based S&P 500 and Nasdaq Composite indices, we’ve annotated key levels of price resistance on the weekly charts below:
On the first chart above (the S&P 500), the horizontal line marks resistance of the July 2008 low, which was previously a key level of support before the price eventually broke down to a new low. The Nasdaq, which has been showing more relative strength than the S&P 500 is already well above its July 2008 low, but now is approaching resistance of its 2008 highs. Again, these levels may prompt long-term “buy and hold” investors to sell into strength of the prior breakdown levels, if they haven’t already done so. The common mentality of a typical investor holding a losing trade is, “I hope I can just sell at breakeven on this one.”
In the coming week, the resistance levels above may play a role in market direction. However, a much bigger determinant will be the stock market’s reaction to the next round of quarterly earnings reports. Earnings season officially kicks off with the trumpeting of Alcoa’s (AA) latest results, scheduled to be posted after today’s close. Then, the reports quickly kick into high gear. Intel (INTC) reports on Tuesday, Google (GOOG) reports on Thursday, and Bank of America (BAC) reports on Friday. Negative surprises from any of these companies, as well as a raft of numerous others, could spook the market (which wouldn’t necessarily be a bad thing, as it would create more trade setups on a pullback). This may be a good time to review your holdings, and find out the scheduled earnings dates of your positions. If not comfortable holding through earnings, formulate a plan to sell into strength ahead of the report.
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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.
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