S&P And Nasdaq Stuck Between A Rock And A Hard Place

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

Yesterday was another indecisive session, but this time stocks finished modestly higher. Although the major indices each gapped open near their previous day's highs, the bears immediately took control, sending the indices into negative territory several hours later. A bullish reversal in the final ninety minutes of trading lifted stocks off their lows and into the plus column. Both the S&P 500 and Dow Jones Industrial Average gained 0.4%, but a 0.9% decline in the Semiconductor Index ($SOX) caused the Nasdaq Composite to lag behind. The tech-heavy index only managed to close unchanged. Small and mid-cap stocks showed relative weakness as well. The Russell 2000 eked out a 0.2% gain and the S&P Midcap 400 was flat. The Nasdaq settled near the middle of its intraday range, though both the S&P and Dow finished in the upper third of their ranges.

Slightly lower volume failed to confirm the gains in the S&P and Dow. Total volume in the NYSE declined by 1%, while volume in the Nasdaq was 5% below the previous day's level. Market internals were firmly positive at the beginning of the day, but deteriorated as the day progressed. In the NYSE, advancing volume exceeded declining volume by a margin of 3 to 2. The Nasdaq ratio, however, was fractionally negative by 1.3 to 1. The late-day rally failed to significantly improve market internals.

A rise in the price of crude oil yesterday afternoon enabled the U.S. Oil Fund (USO) to zoom 3.1% higher. Despite the weak close the prior day, USO held the breakout level we illustrated in yesterday's newsletter. It also closed above Wednesday's high, which should clear the way for a steady move up to resistance of the 200-day moving average. Looking at the daily chart below, notice how volume has also picked up above average levels over the past two days. All ETFs are synthetic instruments that do not move as a direct result of supply and demand, but the volume surge nevertheless is a sign of institutional demand:

One reason the S&P 500 has become so erratic and indecisive over the past two days is that the index is trapped between major areas of support and resistance. This is illustrated on the chart below:

Since falling below its 50-day moving average two days ago, that has become the new resistance level. Notice how the S&P tested resistance of its 50-MA yesterday, but was unable to move above it. That remains a key area of resistance going into today's session as well. Conversely, the index is now finding support at its prior highs from earlier in the month. Remember that a previous level of resistance becomes the new level of support after the resistance is broken. That's why buyers have stepped in as the index approached its prior high of 1,410 in each of the past two days. The 20-day MA is also sitting just below the 1,410 area, but that doesn't mean a lot when the 20-day MA is crossed below the 50-day MA. If the S&P closes below 1,410 in the next day or two, there will be increased probability of the index testing the March low again. The Nasdaq Composite has a similar chart pattern:

Like the S&P, the Nasdaq is stuck between support of its prior high (2,404) and resistance of its 50-day MA (2,439). Relative weakness in the Nasdaq caused the index to actually probe below support yesterday, but it reversed to close above the pivotal level. The Nasdaq also will have a strong chance of seeing its March low again if it closes firmly below its prior high of 2,404.

At the beginning of the week, the major indices were in short-term uptrends and intermediate-term downtrends. However, don't forget they are now in short-term downtrends as well. As such, it is difficult to find stocks and stock-correlated ETFs that will go up for more than a day or two. Just as 3 out of 4 stocks go up in a bull market, the inverse is true when in a downtrend. Admittedly, it's been challenging to hold short positions lately, but fighting the overall trend may prove even more difficult.

Open ETF positions:

Long DXD, GLD, short IYR, FXI (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)

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. For a free trial to the full version of The Wagner Daily or to learn about Deron's other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .

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