How Far Will The Rally Carry Us?

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

The major indices capped a very strong week with a relatively flat session last Friday. After brushing off a worse than expected unemployment report in the morning, stocks briefly rallied above their near-term consolidations, but drifted back down to close the day near unchanged levels. The S&P 500 edged 0.1% higher, while the Dow Jones Industrial Average slipped by the same percentage. The Nasdaq Composite gained 0.3%. Although the small-cap Russell 2000 was flat, the S&P Midcap 400 scored its fifth straight day of gains by climbing another 0.4%. The main stock market indexes finished the day near the middle of their intraday ranges, but near their best levels of the week.

Total volume in the NYSE was 2% lighter than the previous day's level, as the Nasdaq's volume similarly declined 1%. Not surprisingly, market internals were basically flat. Since the stock market has been consolidating in a tight range, near its recent highs, for the past three days, it's positive that turnover has declined in each of those three sessions. As long as the market's next significant "up" day occurs on higher volume, the overall price to volume relationship will remain bullish. Price action, as well as volume patterns, have been very positive since the major indices broke out above key resistance levels on April 1. With such a tight trading range near the recent highs, we anticipate another leg higher within the next several days.

After the April 1 breakout, we suggested the stock market has now entered into a new intermediate-term uptrend that could last a month or two before the long-term downtrends begin exerting a lot of selling pressure. Now that the April 1 breakout has proven to be legitimate, not just a fluke, let's take a look at the longer-term weekly charts to gather a realistic view of how far the major indices might rally before facing significant resistance. We'll begin with a weekly chart of the benchmark S&P 500 Index. Moving averages have been removed so the weekly downtrend line can be more easily seen:

There are two significant resistance levels the S&P 500 will need to contend with. In the near-term, watch for horizontal price resistance at the 1,396 level (the dashed horizontal blue line). If the S&P overcomes that level, it will subsequently run into major resistance of its long-term downtrend line that began with the October 2007 high. Barring an unexpected sell-off in the near-term, our plan is to remain cautiously bullish on the stock market until the S&P 500 nears the weekly downtrend line shown above. At that point, we will seek to unload long positions and begin initiating new short positions. Until the market proves otherwise, one must assume the firmly established long-term downtrend line will remain intact, sending the S&P back down when it runs into it. Obviously, we would not be looking to enter new short positions if the S&P miraculously blasts through that downtrend line. Next, let's assess the weekly charts of the Nasdaq Composite and Dow Jones Industrial Average:

The weekly charts of the Nasdaq and Dow are similar to the S&P 500 chart. All three have horizontal price resistance from their respective February 2008 highs, with resistance of their six-month downtrend lines a little higher up. We suggest setting price alerts on your trading software to notify you when both any of these three indexes begin to test their February highs. If they break out above those levels, the next area to set price alerts is the weekly downtrend lines. Obviously, the longer it takes for stocks to move higher in the near-term, the more the downtrend lines will close in on the prices of the major indices. As always, we'll keep subscribers informed of our trading plan as the main stock market indexes approach key resistance of their weekly downtrend lines.

Regarding individual ETFs, most of the ones we've pointed out over the past week (SLX, PBW, XME, IYT, EWW, FXI) continue to show great relative strength. Market Vectors Steel (SLX) surged to a new all-time high last Friday. We first brought SLX to your attention after it broke out above its one-month downtrend line at the beginning of last week. Despite a flat market, the PowerShares Clean Energy (PBW) rose another 3% last Friday. The iShares Mexico Index (EWW) is forming a bullish consolidation that could launch it to a new high in the near future. Along with the Retail HOLDR (RTH), we're stalking EWW for potential long entry this week.

Open ETF positions:


Long - FXI, IYT, EWT, INP

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 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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