Missed The Rally? Don't Worry About It!

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

A surprise announcement of a major Fed liquidity injection in the pre-market sparked a bounce that led the major indices to their biggest percentage gains in five years.  The main stock market indexes opened approximately 2% higher, made traders nervous by retracing half of their opening gains in the morning, then rocketed to new intraday highs late in the afternoon.  Small caps led the way, as the Russell 2000 surged 4.6%.  The Nasdaq Composite trailed closely behind with a 4.0% advance.  The S&P 500 rose 3.7%, the Dow Jones Industrial Average 3.6%, and the S&P Midcap 400 3.3%.  All the major indices closed at their best levels of the day.

Not surprisingly, turnover picked up as well.  Total volume in the NYSE swelled 17% above the previous day's level, while volume in the Nasdaq ticked 14% higher.  Although turnover moved back above average levels, one might have expected a much larger volume spike considering the magnitude of yesterday's gains.  The Nasdaq's volume on March 4, for example, exceeded yesterday's level.  That day, the index finished just fractionally higher after undercutting its prior low from February.  Volume in the NYSE was greater than yesterday's level as recently as January 31.  Institutions were certainly buying yesterday, but the lack of a massive volume surge leads us to believe yesterday's gains were largely driven by the covering of short positions, not aggressive buying of new positions by mutual funds and hedge funds.  This, of course, could change if the bounce gets some legs, but that didn't seem to be the case yesterday.

If you were flat and feeling bad you didn't participate in yesterday's rally, don't worry about it!  Early in yesterday's pre-market session, the S&P and Nasdaq futures were positioned for just a slightly higher open.  It wasn't until the unexpected Fed announcement that the futures zoomed higher and enabled the main stock market indexes to open 2% higher.  News-driven gaps obviously cannot be anticipated.  Further, with the S&P, Dow, and Nasdaq closing at new 52-week lows for a few days in a row, there was no good reason to have been long from overnight.  Remember that blindly trying to call a bottom without a valid technical reason is a dangerous proposition.  Though it might feel like you missed out on a huge rally, astute swing traders who respect risk actually should have been flat going into yesterday.  We were, and had no regrets.  Most importantly, support of the January intraday lows gave us a  good reason to lock in nice profits on our short positions a couple days before.

After the open, the broad market trended lower all morning.  By mid-day, it had already given back half of its opening gains.  Considering we are still very much in a bear market, it would not have been surprising if the morning selling had persisted throughout the entire day. The indecision eventually resolved itself to the upside, and stocks rallied to new intraday highs in the final hour of trading.  The strong close increases the odds of getting additional upside follow-through in the coming weeks.  As such, we now anticipate a tradeable counter-trend bounce that will provide select opportunities for near-term momentum trading on the long side.  Nevertheless, the broad market has a ton of overhead supply and technical resistance levels to contend with.  This is illustrated on the daily chart of the S&P 500:

Going into today, the S&P 500 will already be faced with resistance of the prior lows from February (the blue dashed horizontal line).  A prior support level always becomes a new resistance level after the support is broken, so expect formidable resistance to be found in the vicinity of yesterday's highs.  Just above resistance of the February lows is the 20-day exponential moving average, at 1,334.  More significantly, convergence of the three-month downtrend line (the red line) and 50-day MA is at the 1,360 to 1,370 area. When multiple levels of price resistance come together at the same level, it becomes even more difficult for an index, stock, or ETF to rally above it.  For a great example of this, just notice how the touch of the 50-day MA on February 27 (circled in blue) triggered the sell-off that sent the S&P 500 to a new 52-week low just a few weeks later.

After such a huge one-day rally, we can expect stocks to digest their gains for at least a day or two.  But as long as the broad market holds near yesterday's highs, short-term buying opportunities should begin presenting themselves over the next few days.  We'll give you a heads-up on which ETFs have the best chart patterns and/or relative strength after observing today's follow-up price action.  We first want to make sure yesterday's rally was not just a knee-jerk reaction that quickly fades.  Don't forget that all recent attempts for the Fed to save the market have resulted in only short-lived bounces. In the near-term, our bias is now cautiously bullish, but we remain bearish on the intermediate and long-term trends.  If the major indices begin moving back above their 50-day MAs, the intermediate-term bias would become bullish as well.  As trend traders, we're equally comfortable buying or selling short ETFs, whichever the market dictates.  

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 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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