S&p 500 Pulls Back To 5-year Uptrend Line

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

Much like navigating a mine field, stocks bobbed and weaved all over the place yesterday.  When the closing bell finally came to save the day, most of the major indices had finished moderately lower.  The Nasdaq Composite lost 1.0%, the S&P 500 0.6%, and the Dow Jones Industrial Average 0.3%.  Small caps showed a bit of relative strength, enabling the Russell 2000 to gain 0.4%.  The S&P Midcap 400 slipped 0.5%.  All of the main stock market indexes finished just below the middle of their wide intraday ranges.

Aided by the 308 million share volume spike in Intel, total volume in the Nasdaq surged 43% above the previous day's level.  It was the most active day in the Nasdaq in more than two months. Turnover in the NYSE rose 18%, well above average levels.   Despite the market's losses, internals were slightly positive.  In both the NYSE and Nasdaq, advancing volume marginally exceeded declining volume.

Lately, we've been discussing the close proximity of the S&P 500 to major support of its prior low from August 2007.  Yesterday, the index dipped below that 1,370 level on an intraday basis, but finished a few points above it.  More importantly, the S&P also closed right on support of its five-year primary uptrend line.  This is shown on the long-term monthly chart below:

Every time the S&P has touched support of its long-term uptrend line in recent years, it bounced squarely off it, eventually rallying to new highs later.  Will it do the same again or will the uptrend finally end this time?  It's obviously too early to tell, but there are two notable differences on the current test of support: high volume and "big red bars."  As you can see, volume has been much higher than average over the past several months, and is likely to come in much higher than average this month as well.  This hints at real institutional selling beneath the surface of the price pattern.  Second, previous pullbacks to the uptrend line have been gentle retracements that ended with the formation of monthly "hammer" candlestick patterns.  This time, however, there is only a "big red bar" with no sign of a hammer yet.  Whether or not downward momentum causes the S&P to break down, we can surely expect high volatility while the bulls and bears battle for control at this major area of support.

The Nasdaq monthly chart is looking a little better than the S&P, as it is still firmly above support of its long-term uptrend line.  However, the index has fallen to major support of its prior highs from March and April of 2006.  This level initially provided the impetus for the index to bounce in August of 2007, and may do the same this time:

The market's recent volatility has prompted us to take a shorter than usual time horizon on recent trade entries.  As with Tuesday's downward resolution out of the short-term trading range, we were busy managing positions throughout yesterday's swings.  We closed our positions in the UltraShort Oil and Gas ProShares (DUG) and iShares Brazil Index (EWZ) when the stock market began to bottom late in the morning.  Though we held each position only two days, both netted a gain of more than 3 points.  Rather than risk sitting through a potential bounce in the broad market, we made a judgment call to quickly lock in gains in both.  We also entered a new long position in the UltraShort Emerging Markets Pro Shares (EEV) when it began to break out above its prior high from December.  The trade subsequently took off, leaving us with a marked to market gain of more than 3 points.

NOTE: The U.S. stock markets will be closed on Monday, January 21 in observance of Martin Luther King day.  As such, The Wagner Daily will not be published that day.  Regular publication will resume the following day.

Open ETF positions:


Long - PPH, EEV

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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