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Morpheus TradingMajor Market and ETF Trading |
Are You Overtrading?
Stocks continued their see-saw action, as the major indices gapped up to the top of their recent range yesterday, but promptly sold off and trended lower throughout the day. The major indices surrendered all of Wednesday's gains and then some. The S&P 500 fell 1.3%, as both the Nasdaq Composite and Dow Jones Industrial Average lost 1.2%. The small-cap Russell 2000 and S&P Midcap 400 Index shed 1.9% and 1.3% respectively. Opposite of Wednesday's action, but the same as Tuesday's, the main stock market indexes closed near their intraday lows. Has the price action of the past three days got you dizzy yet?
Total volume in the NYSE eased just 3%, while volume in the Nasdaq was on par with the previous day's level. The NYSE has had nine straight days of below average volume, but lighter turnover is common when the broad market is in an indecisive range. Market internals were quite strong on the open, but steadily deteriorated throughout the day. By the closing bell, declining volume had exceeded advancing volume by approximately 4 to 1 in both exchanges.
In yesterday's Wagner Daily, we annotated a daily chart of the near-term support and resistance levels of the recent trading range in the S&P 500. We then said that, "Failing to wait for confirmed closing prices above or below these pivotal levels before buying new positions could easily lead to churning one's account. Based on what the market has shown us so far this week, one must be cognizant of the risk of overtrading without the market first confirming the direction of its next move." If you heeded those cautious comments by waiting for a breakout of the range and avoiding new trade entries yesterday, the bearish intraday price action should have had little to no effect on your trading account.
Though we looked at the daily chart of the S&P yesterday, the shorter-term hourly chart more clearly shows just how indecisive the market has been over the past week. On the hourly chart below, the red horizontal line marks pivotal resistance of the recent range, while the blue horizontal line defines key support:
It's not only the S&P that has been schizophrenic. The hourly chart of the Nasdaq Composite doesn't look any better:
Though the hourly chart of the Nasdaq Composite is quite erratic, the 20-day exponential moving average on the daily chart has been perfectly acting as resistance over the past month. We often discuss the power of the 20-day EMA to act as support or resistance in strongly trending markets. The chart below is a great example of this:
If the Nasdaq can't muster up enough strength to break out above its recent range very soon, be prepared for the 20-day EMA to push the index back down to test its January lows.
We're prepared to promptly enter a new trade or two when the major indices begin breaking out of their whippy ranges. We don't care which direction the breakout resolves itself either. In case the resolution is to the downside, like the primary trends, regular subscribers should note we are already stalking a re-entry into the UltraShort S&P 500 ProShares if the S&P 500 breaks support today. But until we see a convincing break out of the ranges shown above, there simply is no reason to buy or sell short anything (unless you're a daytrader).
Most mutual funds have bylaws that severely restrict the percentage of their cash holdings to the area of one percent. However, as an individual investor, realize that you possess one of the greatest luxuries in the world of investing -- the ability to remain fully in cash, safely preserving capital, when trading conditions are not ideal. Are you taking advantage of that luxury at times, or do you always feel the need to be in the market? If the latter, it may surprise you to know that the most profitable traders we know are out of the markets more than they are in the markets.
Open ETF positions:
Long - (none)
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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