Market Approaching Key Support – The Wagner Daily
The Wagner Daily – June 6, 2011
Concise technical analysis and picks of the leading global ETFs
Commentary:
All five major indices dropped sharply on Friday on mixed trade. Last week marked the fifth straight week that the S&P 500 finished in the red. Higher beta stocks took a beating as both the tech rich Nasdaq and small-cap Russell 200 fell 1.5% yesterday. The S&P MidCap 400 followed close behind as it shed 1.3% on the session. The S&P 500 and the Dow Jones Industrial Average sank by 1% and 0.8% respectively.
Internals ended the day mixed. Volume was fractionally higher on the Nasdaq but down 5% on the NYSE. However, declining volume dominated across the board. The ratio of declining volume to advancing volume ended the session at 3.9 to 1 on the Big Board and 5.8 to 1 on the Nasdaq. Because of the lighter volume we would not consider Friday to be a distribution day on either the Nasdaq or the NYSE.
Via an intraday alert we entered a long position in the ProShares UltraShort MidCap 400 (MZZ) yesterday. We like this trade because it is breaking out of a two month base on strong volume. For our subscribing members trade details are available in the open positions segment of the newsletter.
After several days of strong selling the S&P 500 index ($SPX.X) has lost support of its 10 month uptrend line. However the S&P is now trading near the key support level of 1294.70 (April 18th swing low). Generally speaking, previous swing lows will act as support in a selloff since they attracted buyers the last time the index reached that level. Further, this low is of particular importance to the S&P 500 as it now only undercuts a key psychological mare of 1300 but also would represent further confirmation that a correct or possible trend reversal is underway. One of the requirements for a correction/trend reversal is the establishment of a “lower, low” and a break below 1294.70 would meet this criteria. Nonetheless, it is not unusual for a market to bounce at key levels that have not yet been tested. It is also noteworthy that the next key support level below 1294.70 is at the 200-day MA which also coincides with long term trend line dating back to the start of the bull market rally in March of 2009. Should we break below the current levels, the 200-day MA could serve as a very formidable level of support.
The SPDR KBW Regional Bank ETF (KRE) may present an excellent shorting opportunity on a bounce into resistance. KRE has shown significant relative weakness since the broad market began rallying in March 2009. This weakness has carried over recently as KRE has lost support of its 20-day EMA, 50-day MA and 200-day MA well ahead of the market. A rally back into resistance somewhere near these key marks should provide a short entry trigger for KRE. We will be monitoring KRE for a possible entry point.
Friday’s selloff was broad based as most industry groups participated in the slide. With the S&P 500 losing ground for five weeks now, we will be inclined to take profits quickly in the event of a sharp gap down/selloff on Monday. Although our market bias is currently bearish, the duration of the current broad market selloff suggests profit taking into weakness is probably a prudent course of action.
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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