Don't Forget The Long-term Trendlines

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

The stock market concluded a whippy and indecisive week on a positive note, as the major indices built on the previous day's gains.  A late morning sell-off again kept traders on their toes last Friday, but the bulls pushed equities back to their intraday highs later in the afternoon. The S&P 500 gained 1.2%, the Nasdaq Composite 1.0%, and the Dow Jones Industrial Average 0.7%. Small and mid-cap stocks showed relative strength for a second straight day, sending the Russell 2000 and S&P Midcap 400 indices higher by 2.4% and 2.3% respectively.  All the main stock market indexes closed near their best levels of both the day and week. 

Total volume in the NYSE slipped 12% below the previous day's level, but trading in the Nasdaq ticked 10% higher.  The Nasdaq technically registered its second straight "accumulation day" by gaining on higher volume.  However, the heavier turnover was fully the result of gigantic volume spikes in both Yahoo! and Microsoft.  In the pre-market, Microsoft announced an acquisition bid for the internet giant.  Without such news, Nasdaq volume would have been lighter as well.  Nevertheless, it's notable that both exchanges advanced on higher than average volume levels.  Advancing volume in the NYSE exceeded declining volume by an encouraging margin of 5 to 1.  The Nasdaq ratio was positive by just over 2 to 1.

Last week's gains in the major indices were the highest in nearly five years.  The S&P 500 climbed 4.9%, the Dow Industrials 4.4%, and the Nasdaq 3.7%. However, those solid advances were not surprising given the massive pounding stocks suffered in January.  On a closing basis, the S&P 500 was down as much as 13% in the month of January.  With massive volatility gripping the market in both directions, be careful not to get too sucked in by the hype of large gains or losses from day-to-day.  Instead, use technical analysis to keep you grounded and aware of the "big picture."  One of the best ways to do so is by reviewing the long-term charts of the main stock market indexes at least once per week.  Daily charts should be studied more regularly.

The weekly chart of the Dow Jones Industrial Average, always a favorite benchmark of the financial talking heads, is in a precarious state right now. Take a look:

In mid-January, the Dow broke plunged below support of an uptrend line that had been in place for nearly five years.  Last week, the index bounced firmly off the lows and closed at the top of the week's range.  The popular financial media may trumpet last week's 4.4% gain in the Dow, but what they won't tell you is that the index closed at major resistance of its prior uptrend line.  Remember that a prior level of support always becomes the new resistance after the support is broken.  Further, the longer that prior area of support was in place, the more difficult the resistance will be to overcome.  Therefore, one should expect the Dow to have difficulty moving much higher in the near-term.  Its 50-day moving average also looms just over 200 points higher.  The rest of the broad-based indexes lie in a similarly challenging state.

Along with the major indices running into new resistance of their prior uptrend lines, another problem we see is the dreadful chart patterns of nearly every stock.  Rather than forming sound bases of consolidation they could subsequently break out of, most stocks rapidly zoomed off their lows last week.  At best, it would require several more weeks for bullish patterns to form in leading stocks.  But the more likely scenario is that stocks and ETFs will first revisit their "swing lows" set last month.

  Only the near-term patterns of the major indices are bullish.  Their intermediate and long-term trends remain firmly bearish.  As longer-term trends always hold precedence over shorter-term trends, odds favor at least a re-test of the prior lows, perhaps more, before beginning to build any sustainable bases of support.  Now is the time we can finally consider new short sale entries of ETFs that are running into major resistance levels. Subscribers should note our specific trigger, stop, and target prices of today's new setup below.

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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