Small-Cap Russell 2000 Tests Its August Low

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

A plethora of market-moving news and rumors fueled whipsaw action that saw the major indices break out above their previous day's highs, sell-off below their prior day's lows, then recover to close near the middle of their intraday ranges. When the dust finally settled, most of the main stock market indexes had closed modestly higher. The Nasdaq Composite, up 1.5% at its intraday peak, and down by the same percentage at its intraday trough, finished nearly in parity. The tech-heavy index eked out a 0.1% gain. Both the S&P 500 and Dow Jones Industrial Average advanced 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices each slipped 0.1%. Though the trading days preceding holiday periods are often uneventful, yesterday's session was anything but boring!

Yesterday's wild volatility undoubtedly triggered many stops in both the bull and bear camps, spurring a rise in turnover. Total volume in the NYSE increased 11%, while volume in the Nasdaq zoomed 21% above the previous day's level. Technically, the higher volume gains in the S&P 500 and Nasdaq Composite caused both indexes to register a bullish "accumulation day." But considering the indecisive intraday price action, it would be misleading to declare yesterday's session as being driven by institutional buying. Further, market internals failed to even settle in positive territory. In both the NYSE and Nasdaq, declining volume fractionally exceeded advancing volume.

Two days ago, we said that the Market Vectors Gold Miners (GDX) was poised to end its short-term correction and resume its primary uptrend. After a one day "shakeout" below the 50-day MA, it popped above its two-week downtrend line and closed at its intraday high yesterday. Convergence of the 10 and 20-day MAs is just overhead, but a rally above yesterday's high could send GDX back to test its prior high over the next several weeks. The breakout above the downtrend line is illustrated on the daily chart below:

In addition to GDX, the StreetTRACKS Gold Trust (GLD) also cruised higher yesterday. GLD has a similar chart pattern to GDX, except that it has shown more relative strength by holding above its 50-day MA the whole time. Sometimes the individual mining stocks of GDX trade differently than the spot gold commodity of GLD, but it appears that both are trading in similar fashion right now.

Following up on our technical look at the major indices, two notable events happened yesterday. The laggard Russell 2000 Index, which set a new 52-week closing low the previous day, bounced off support of its prior intraday low from August. It's too early to tell whether or not key support of this prior low is likely to hold, but the test of such an important support level should at least generate a decent bounce in the short-term. As the small-cap index was previously weighing on the major indices, a stabilization of price in the Russell could help the S&P, Nasdaq, and Dow as well. The bounce off of the intraday low of August is annotated below:

The 200-day MA of the Nasdaq Composite was violated on an intraday basis yesterday, but it's positive that the index recovered to close above it. Intraday probes below major support levels have the effect of washing out the "weak hands" by triggering their stops at obvious support levels. "Stop hunts" such as these absorb overhead supply, which is often necessary in order for markets to recover and move higher. Therefore, one could actually view yesterday's dip below the 200-day MA as bullish because the Nasdaq managed to close back above it:

Although the probe below the prior low could be construed as beneficial for the market, all bets are off if the Nasdaq subsequently closes below its 200-day MA in today's session. Therefore, it is unwise to blindly begin buying stocks and ETFs in the Nasdaq just because of yesterday's price action. Rather, wait for additional confirmation of a market reversal, such as a close above yesterday's high. That would also put the Nasdaq back above its 10-day MA for the first time in two weeks.

NOTE: The U.S. markets will be closed on Thursday, November 22 for the Thanksgiving Day holiday, and will close at 1:00 pm ET on Friday. As such, The Wagner Daily will not be published on Thursday, but regular publication will resume with a brief edition on Friday. Enjoy the holiday with your family and friends!

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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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