A Look At The Long-term Charts

NOTE: Please click on the charts below to enlarge them if they do not appear clearly.

Stocks digested last Friday's pummeling, as the main stock market indexes consolidated in the area of their previous day's lows throughout the session. Both the S&P 500 and Dow Jones Industrial Average finished within 0.1% of the flat line, but last week's breakdown to a fresh 52-week low caused the Nasdaq to show relative weakness. Down 1.4% at its afternoon low, the Nasdaq Composite recovered in the final hour to lose just 0.6%. The small-cap Russell 2000 lost 0.3%, as the S&P Midcap 400 edged 0.2% higher. Although the Nasdaq closed in the dead middle of the day's range, the rest of the major indices settled in the upper third of their intraday ranges.

Total volume in the NYSE was on par with the previous day's level, while volume in the Nasdaq ticked 7% lower. When stocks consolidate immediately following a big move in the broad market, turnover commonly eases. Market internals in both exchanges were negative but not by an overly wide margin. Declining volume in the Nasdaq exceeded advancing volume by approximately 2 to 1. The NYSE adv/dec volume ratio was only fractionally negative.

When a stock or index consolidates at the top of its range after a big rally, it's a bullish sign that usually leads to a continuation of the uptrend. Conversely, the opposite is also true. Even though the S&P and Dow were basically unchanged yesterday, it's bearish that both indexes spent the entire day at or below the prior day's low. This technically positions the broad market for further losses in today's session. Since the Nasdaq failed to immediately snap back from last Friday's breakdown to a new 52-week low, one must also assume last week's key break of support was for real.

Stocks and ETFs at new 52-week highs usually accumulate impressive gains before pulling back. This is simply due to the lack of overhead resistance levels. If traders and investors stuck at higher prices are not selling into strength every time the market moves higher, it doesn't require a lot of buying pressure for stock and ETFs at new highs to continue higher. This is why, at least in a bull market, we prefer buying breakouts to new highs. Not surprisingly, the inverse is also true of stocks, ETFs, and indexes at new 52-week lows.

Devoid of significant support levels where traders and investors are inclined to step up to the plate, downside momentum in new lows can often become quite substantial before the bulls finally return. The Nasdaq set a new 52-week closing low in each of the past two days, while the S&P and Dow are in perilously close to breaking down as well. With the major indices now testing their January lows, it's a good idea to know the "big picture" of where they might find their next major support levels. For this, one of the most reliable techniques is to apply Fibonacci retracement lines to the long-term monthly charts. We have removed the usual moving averages from the following monthly chart of the Nasdaq to more easily see the Fibonacci retracement levels:

Circled in blue, notice how the Nasdaq's January low (on an intraday basis) perfectly coincided with a 38.2% Fibonacci retracement from the October 2002 low to the October 2007 high. Especially on the long-term chart intervals, stocks and indexes frequently attempt to reverse after the initial test of the 38.2% retracement level. Though the Nasdaq is trading at a new low on a closing basis, but the January intraday low is technically still a valid support level, especially since it coincides with a 38.2% retracement.

If the Nasdaq slices through its intraday lows from January, the next stop is the 50% retracement, around the 1,985 level. Circled in pink, notice how the low of July 2006 coincides with this 50% level. This is not coincidence, as the magic of Fibonacci retracements is that they often line up with prior significant areas of price support or resistance. When there is convergence of a Fibonacci level and a prior low, the support becomes even stronger. Taking it a step further, the low of August 2004 nicely aligns with the 61.8% Fibonacci retracement at 1,778. Because of this convergence at all levels, we believe these are the "big picture" levels of price support to watch in the Nasdaq: 2,191, 1,985, and 1,778. You may want to set alerts on your trading software to notify you of a test of these levels, as they represent good prices to cover any short positions and/or dip a toe in the water on the buy side.

In case you're not yet impressed with the convergence of price support and Fibonacci retracement levels in the Nasdaq, you may find it interesting that we have essentially the same technical picture in the S&P 500. As per the monthly chart below, 1,267, 1,172, and 1,077 should act as major support levels in the S&P:

It's looking more and more like a test of the 50% retracement levels is going to happen, but that doesn't mean there won't be some violent short squeezes and counter-trend retracements along the way. There are sufficient opportunities for profitable trading out there, but the two keys are to reduce your share size and utilize a shorter-than usual time horizon on all trades. The less time in the market, the less overall risk.

Open ETF positions:


Long - DXD

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 e-mail alerts are also sent 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 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. Wagner is currently working on this third book, scheduled for publication in early 2008.





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.

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