What Long-term Uptrend Line?

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

The S&P 500 sliced through key support of its five-year uptrend line that we illustrated in yesterday's Wagner Daily, triggering major downward momentum throughout the rest of the day.  The benchmark S&P 500 suffered a 2.9% decline, the Dow Jones Industrial Average shed 2.5%, and the Nasdaq Composite fell 2.0%.  The small-cap Russell 2000 and S&P Midcap 400 indices lost 2.8% and 2.9% respectively. As with many days this month, stocks closed at their worst levels of the session.

Total volume in the NYSE ticked 2% higher, while volume in the Nasdaq eased 16% below the previous day's level.  Turnover in the NYSE was at its highest level of the past five months.  Nasdaq trading remained near multi-month highs as well.  With volume at such high levels, the price to volume relationship in the market clearly remains negative.  All new buys in the stock market remain overly risky until we see at least one day of strong gains on firmly higher volume in either the NYSE or Nasdaq.  This would be the first clear sign of a potential reversal of the downward momentum.

The financial media offered a plethora of reasons for yesterday's carnage, but the technicals tell the real tale of what happened.  As anticipated, the S&P 500 crashed through support of its five-year uptrend line.  With the long-term uptrend line now broken, the next major area of support should be found around the 1,267 level.  This is the 38.2% Fibonacci retracement from the October 2002 low to the October 2007 high.  This is shown on the updated monthly chart of the S&P 500 below:

Previous tests of this primary uptrend line on the S&P 500 provided a low-risk entry point for long-term investors to enter the market.  However, the break of this major support level undoubtedly triggered a plethora of stops amongst both individual and institutional investors.  We expect the S&P to attempt to snap back above its trendline in the coming days, but it will have a very difficult time doing so.  Tons of overhead supply has now been created, and this prior area of key support has now become a major area of resistance.  The break of the five-year uptrend line in the S&P 500 lays to rest any argument that maybe, just maybe, we're not yet in a bear market.

Yesterday's sell-off spread to even the so-called "defensive" sectors.  As such, we stopped out of our long position in the Pharmaceutical HOLDR (PPH) with a 1.2 point loss.  However, we also netted a gain of approximately 6 points on our long position of UltraShort Emerging Markets ProShares (EEV).  Combined with the week's gains in DUG long and EWZ short, we had a very profitable week, despite the weakness in the market.  We are now "flat and happy," waiting for the next ideal short-term opportunities to present themselves.

Whether it lasts weeks, months, or years, the good news is that all bear markets eventually end.  Your job is just to preserve capital throughout this period so that you can be fully locked and loaded when buying opportunities clearly begin presenting themselves once again.  In the meantime, we'll continue to focus on select short-term trading opportunities.  Your mantra for surviving this bear market is "trade what you see, not what you think!"  Winners embrace reality, not hope.

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.

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Open ETF positions:


Long - (none)

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.

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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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