Better than expected earnings reports from semiconductor giant Intel and banking leader JPMorgan Chase sparked a broad-based rally yesterday, enabling the major indices to convincingly surge above last month’s prior highs. Stocks gapped sharply higher on the open, traded sideways throughout most of the day, then made another leg up in the final hour of trading. The S&P 500 Index motored 1.8% higher, while both the Nasdaq Composite and Dow Jones Industrial Average climbed 1.5%. All three indexes closed at fresh 52-week highs. The small-cap Russell 2000 jumped 2.0% and the S&P Midcap 400 advanced 1.8%. All the main stock market indexes finished near their intraday highs.
Turnover soared across the board, enabling the S&P and Nasdaq to score a bullish “accumulation day.” Total volume in the NYSE was 18% higher than the previous day’s level, as trading in the Nasdaq swelled 16%. The return of institutional buying helped volume in both exchanges move back above 50-day average levels, albeit only marginally. It was positive that a session of higher volume gains followed the previous session’s “distribution day.” Market internals were solid, indicating broad-based buying interest. In the NYSE, advancing volume exceeded declining volume by a margin of 7 to 1. The Nasdaq adv/dec volume ratio was positive by more than 4 to 1.
If you glanced at just the briefest moment of financial news on the popular media outlets last night, you undoubtedly were bombarded with enthusiasm and hype that the Dow Jones Industrial Average has recovered to close above the 10,000 market for the first time in a year. But even though 10,000 is a nice, round number to get the general public excited about, the reality is there’s absolutely no technical significance to that price level. The Dow was already trading at its 52-week high, and no substantial price resistance was overcome in order for the Dow to break 10,000. If anything, the 10,000 level offered only a bit of psychological resistance. What is notable, however, is that the Dow is now just 5% away from major resistance of a two-year downtrend line. This is shown on the weekly chart below:
Presently, the long-term downtrend line of the Dow is around the 10,500 level, approximately 5% above its current price. Because that downtrend line is so lengthy, the Dow will almost certainly face a formidable amount of resistance as it nears that level. Furthermore, resistance of the 50% Fibonacci retracement, from the October 2007 high to the March 2009 low, is just above the 10,300 level (only 3% higher). The weekly chart of the benchmark S&P 500 is also showing similar resistance of its long-term downtrend line, but it’s only about 3% above its current price. Take a look:
Because of the fast-approaching resistance levels shown above, savvy technical investors and traders may soon consider lightening up on any long-term positions into strength. After the inevitable short to intermediate-term correction eventually comes, positions can then be re-entered at what will likely be better prices. Even if a substantial pullback doesn’t occur (which we believe is unlikely), stocks are bound to undergo a lengthy period of price consolidation as the S&P and Dow run into their long-term downtrend lines.
Ironically, and somewhat humorously, one popular financial news outlet was implying that the Dow’s crossing of the 10,000 level was a good reason for the general public to now start jumping back in the market. Ha! Where was that advice 6 months ago? If only the average investor were to glance at a long-term chart of the S&P or Dow, he/she would not start buying, right as the stock market approaches huge long-term resistance levels. In the near-term, the market continues to act bullish, and has given us no solid reasons to exit long positions or start selling short. However, it would be unwise to discount the very real possibility that the long-term downtrend lines shown above will soon pressure the short and intermediate-term uptrends.
Open ETF positions:
Long – DGP, FCG, DBB, UNG
Short – (none)
NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.
Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner’s new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is 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. He is also a frequent guest speaker at various trading and financial conferences around the world.
For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.
