Stocks Ignore Correction In Chinese Markets

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

A 6.5% drop in the Shanghai stock market caused the major indices to gap lower on the open, but the broad market promptly reversed, causing stocks to trend higher throughout the session. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each posted identical gains of 0.8%. The S&P Midcap 400 Index showed relative strength by powering 1.1% higher, while the small-cap Russell 2000 advanced 0.7%. After several failed attempts over the past week, the S&P 500 finished at a new all-time closing high. Each of the major indices settled at their intraday highs, indicating institutional support into the close.

Total volume in the NYSE increased by 10%, as volume in the Nasdaq surged 20% above the previous day's level. The solid gains on higher turnover caused both the S&P and Nasdaq to register a bullish "accumulation day" that pointed to buying by mutual funds, hedge funds, pension funds, and other institutional players. Furthermore, volume in both exchanges moved back above average levels. Market internals were solid. Advancing volume in the NYSE exceeded declining volume by a margin of nearly 7 to 2. The Nasdaq ratio was positive by just over 2 to 1.

In yesterday's Wagner Daily, we speculated as to whether or not the S&P 500 would hold above support of its 20-day exponential moving average. Though it tested support of the line in three of the past four days, it again managed to once again do so. The closing price of 1,530 also was enough to erase the prior historical closing high of 1,527 that has been a pivotal area of resistance over the past week:



As you can see, the S&P is still a few points below last week's intraday highs, but just a little pop in today's session would confirm the fresh closing high.

The Nasdaq Composite has been more indecisive in recent weeks, but it managed to set a new six-year closing high. Like the S&P 500, it still has a little work to do in order to move above last week's intraday highs, but just a small amount of overhead supply remains:

As for the ever-resilient Dow, need we say that the blue-chip index again closed at a new record high? It has been an impressive six weeks since the Dow Jones Industrial Average even touched its 20-day EMA, let alone even coming near its 50-day MA. With absolutely no horizontal price resistance in its path, it won't take a lot of buying pressure to enable the Dow to keep setting new highs:

The S&P Midcap 400 and small-cap Russell 2000 indices have lagged behind the other primary stock market indexes over the past several months, but they seem to be joining the party now as well. Both indexes managed to conclude the session at historical closing highs, though each one remains just below last week's intraday highs.

True to our expectations, the S&P managed to trend all the way to a fresh record closing price before sustaining any kind of substantial price correction. When a benchmark index such as the S&P is trading in close proximity to such a closely-watched resistance level, it's almost a given that traders will test the level by closing above it at least once. What happens next will be of paramount importance. The index could continue zooming to successive new highs in the coming weeks, just as the Dow did upon setting the milestone. Conversely, institutions could just as easily use the bullish accomplishment as a good excuse to take well-deserved profits from the stock market's amazing rally off its March lows. Rather than speculating on the likely outcome, the easiest and most profitable situation is to simply trade what we see, not what we think.

Open ETF positions: Short FXI, XME (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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