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

The broad market followed through on the previous afternoon's bearish reversal, causing the major indices to close substantially lower.  Stocks gapped lower out of the starting gate, then drifted lower throughout the entire day.  The S&P 500 shed 0.9%, the Nasdaq Composite 1.0%, and the Dow Jones Industrial Average 1.5%.  As it has done for at least the past month, the S&P Midcap 400 Index continued to show impressive relative strength by slipping just 0.2%.  The small-cap Russell 2000 lost 0.4%.  A bounce in the final fifteen minutes of trading lifted the main stock market indexes off their worst levels of the day, though such late-day buying at the conclusion of a firmly negative day is often the result of short covering by intraday traders.

Turnover was mixed.  Total volume in the NYSE rose 7% above the previous day's level, while volume in the Nasdaq conversely eased 10%.  The significant higher volume losses in the NYSE caused the S&P 500 to suffer another bearish "distribution day."  Since it was the fifth such day of institutional selling in recent weeks, traders should now be cautious on the long side of the S&P and Dow. A healthy market can withstand a few days of selling by mutual funds and hedge funds over a four-week period, but the presence of more than four "distribution days" often spells an end to a streak of bullish momentum.  Still, it's positive that the Nasdaq's loss occurred on lighter volume.  Since the Nasdaq has been the leading index on the way up, its performance is more important than that of the laggard S&P and Dow.  In both exchanges, declining volume outpaced advancing volume by a margin of 5 to 2.

UltraShort Financials ProShare (SKF), which we analyzed extensively in yesterday morning's commentary, followed through nicely to the upside.  Leveraged and designed to move at twice the percentage change of the underlying financial sector, and in the opposite direction of the sector, SKF surged 4.4% higher yesterday.  As volume picked up, SKF also closed above the high of its recent price consolidation.  Resistance of its 50-day MA, just above yesterday's high, will be the next formidable challenge.  However, we think odds are good that it breaks out above the 50-day MA this time because it will be the third such test of resistance within the past two months.  Each successive test of the 50-MA increases the odds of an eventual breakout above it.  The same is true of moving averages of other intervals as well.  SKF is already showing an unrealized gain of 4 points since our May 19 entry, but realize it's a volatile ETF.  Our price target is substantially higher. 

StreetTRACKS Gold Trust (GLD), which mirrors the price of the spot gold commodity, gapped up to close above its 50-day MA yesterday.  The last time GLD closed above its 50-day MA was on April 16 of this year, but it immediately fell back below its 50-day MA the following day.  We'll be closely monitoring price action of GLD over the next few sessions.  If it holds in a tight, sideways range, it will increase the odds of GLD "sticking" above its 50-day MA and subsequently making another leg up in the intermediate-term.  Below is the daily chart of GLD, which is now showing an unrealized gain of 4% (3.6 points) since our May 15 entry:

Also bucking the trend of yesterday's broad-based weakness was the energy sector, which has been on an amazing tear.  After the Oil Service HOLDR (OIH) closed just above the high of its multi-week consolidation on May 15, we suggested the setup for a quick, momentum-based buy entry.  OIH has gained every day since then, advancing more than 4% (9 points) over the past three sessions.  But remember we suggested OIH as merely a short-term play.  With crude oil now extended 14% above support of its 50-day MA, it could reverse sharply when the inevitable correction eventually comes.  OIH would likely follow suit.  As such, if you bought the breakout in OIH, consider using a tight trailing stop to maximize any additional gains while protecting existing profits.  We presently would place a trailing just below yesterday's low, which happens to converge with support of the 20-day EMA on the hourly chart.  If OIH gaps higher on today's open, a stop could be trailed below the low of the first twenty minutes, in order to protect against a failed gap up.

As it did just over a week ago, the S&P 500 is again testing support of its intermediate-term uptrend line, which began with the March 2008 low.  The dashed blue line on the daily chart below marks the uptrend line:

With major resistance of the 200-day moving average just overhead, but support of the intermediate-term uptrend line right at yesterday's low, price action over the next several days is likely to be volatile.  Simply put, the S&P 500 is stuck between a rock and a hard place!  Be prepared for another tug-of-war between the bulls and bears, as they battle to determine the next direction of the broad market. If the bulls get the upper hand, we could expect the S&P to swiftly move back and close above its 200-day MA.  Such action would prove the market's rally off the March lows is still alive and well.  But if the bears have their way, the S&P could quickly break support of its intermediate-term uptrend line, as well as the 20-day EMA just below.  The May 9 low, around the 1,384 area, would be the next support, followed by the 50-day MA at 1,367.  Consider holding back on new position entries until the S&P clearly shows the direction of its next move.

Showing relative weakness to the S&P 500, the Dow Jones Industrial Average has already closed below both its 20-day EMA and intermediate-term uptrend line.  The dual failed attempts to move back above its 200-day MA was likely the culprit for the sudden show of bearish momentum in the Dow.  Yesterday's break of support is shown on the daily chart below:

Just a one-day close below a trendline does not confirm a definitive break of support, but the Dow could quickly build on its bearish momentum if it closes below yesterday's low.  Like the S&P 500, the Dow may find near-term support at its May 9 low of 12,715.  Further below, the 50-day MA is at 12,617.  With the Dow now showing the most relative weakness of the main stock market indexes, our bearish position in the UltraShort Dow 30 ProShares (DXD), which nearly hit our stop two days ago, should start to move deeper into the plus column.  Nevertheless, the Nasdaq is still showing enough strength that we cannot yet be overly bearish on the entire market.  Overall, both our near and intermediate-term biases are now neutral to bearish.  Until the major indices prove otherwise, we remain under the basic working assumption that the long-term trends remain "down."

Open ETF positions:


Long - GLD, SKF, DXD, UUP

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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