Will A "higher High" Follow Last Week's "higher Low?"

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

After opening slightly higher, the major indices drifted in a narrow, sideways range throughout the session. The S&P 500 advanced 0.6%, the Dow Jones Industrial Average 0.8%, and the Nasdaq Composite 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices gained 0.4% and 0.7% respectively. Intraday volatility was quite low for a change, as traders and investors remained largely on the sidelines ahead of today's Fed decision on interest rates. The main stock market indexes closed in the upper twenty percent of their tight trading ranges.

Total volume in the NYSE crept 4% higher, while volume in the Nasdaq increased 6% above the previous day's level. Technically, both the NYSE and Nasdaq scored "accumulation days," but price action was not very indicative of institutional accumulation. Further, trading in both exchanges was barely on par with 50-day average levels. Advancing volume in the NYSE exceeded declining volume by 2 to 1. The Nasdaq ratio was positive by just 3 to 2.

Going into today, most of the major indices are poised to test resistance of last week's highs. This is the scenario we expected to occur after last Friday's pullback shook out some of the bulls. With "higher lows" now established in the near-term trends of the S&P, Nasdaq, and Dow, the real test will be whether or not "higher highs" will also be formed. This is annotated on the daily chart of the Dow below:

One probable scenario is that stocks at least break out above last week's highs, drawing in bulls who might anticipate the worst is over, but savvy institutional players may sell into strength of the move. Resistance of the 20-day exponential moving averages on the main stock market indexes should also be rather difficult to overcome as well. As such, the major indices are now at the levels where we'll begin considering re-entries on the short side on the first sign of real weakness. The caveat, however, is that stocks could whip violently in either direction as a reaction to today's Fed decision on interest rates.

As with all meetings of the Federal Reserve Board, we would normally warn you to expect wild volatility after the 2:15 pm announcement. But then again, we've become rather accustomed to monstrous trading ranges anyway, without the help of Fed meetings. Remember that the actual economic policy announced by the Fed today does not matter. Rather, the only thing we care about is the stock market's reaction to the news. The initial knee-jerk reaction to the announcement rarely sticks, as the real reaction is generally not seen until several days later. We suggest avoiding new trade entries today, instead giving the market a chance to reel around and digest whatever Ben and the boys have to say.

Open ETF positions:

Long - XHB
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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