Will The S&P And Dow Follow The Nasdaq To A New High?

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

The stock market concluded the week on a strong note, as each of the major indices gapped firmly higher. Though "quadruple witching" options expiration lent a hand, higher turnover finally confirmed the gains as well. Both the Dow Jones Industrial Average and S&P Midcap 400 indices advanced 0.6%, the S&P 500 rallied 0.7%, and the Nasdaq Composite gained 1.1%. Small-caps shined, enabling the Russell 2000 to surge 1.3%. Curiously, all of the market's gains were the result of an opening gap up. Stocks subsequently drifted sideways to lower, in a tight range, throughout the entire session.

On a technical level, the most bullish thing about last Friday's session was the corresponding volume spikes. Total volume in the NYSE increased by 27% over the previous day's level, while volume in the Nasdaq rocketed 41% higher. This snapped the bearish pattern of the previous eight days, in which each of the four "up" days occurred on lighter volume, and all the "down" days were on heavier volume. Turnover typically rises on "quadruple witching" options expiration days, but the strong volume was positive nevertheless. In both exchanges, volume came in well above 50-day average levels.

In the June 14 issue of The Wagner Daily, we wrote that, ". . .the S&P 500 has retraced just over 50% of its loss from the June 4 high, down to the June 8 low. If the index clears the June 11 high, resistance will next be found at the 61.8% Fibonacci retracement of the 1,520 level. If the S&P manages to close above that level within the next day or two, it could begin to work its way back to the prior high sooner, rather than later." Since the S&P closed above its June 11 high (1,515) that same day, it cleared the way for a rapid ascent back to its prior all-time high. The index closed the week just shy of that level, illustrated on the daily chart below:

Like the S&P 500, the Dow Jones Industrial Average also finished near its prior record high. The difference between the two, however, is that the Dow also moved back above resistance of the lower channel of its prior uptrend:

Continued strength in the tech arena caused the Nasdaq Composite to outperform the S&P and Dow last Friday. The Nasdaq also showed relative strength by jumping to a fresh six-year closing high:

Needless to say, one should expect the S&P and Dow to test resistance of their prior highs within the next several days. Be prepared for erratic action and volatile "stop hunts" as they do. It is also noteworthy to point out that both the Russell 2000 and S&P Midcap 400 indices have only recovered about two-thirds of their losses from the broad market's June peak to trough. We'd like to see these indexes get in sync with the strength in the other major indices.

As for new ETF buying opportunities, look to the Nasdaq, specifically the tech sectors. With the Semiconductor HOLDR (SMH) near its prior high, it should form at least a multi-day base of consolidation here. Buying the resulting breakout from such consolidation would be a solid play. The Nasdaq-100 Tracking Stock (QQQQ) would also look good if it trades sideways for a few days. Be on guard against a false breakout if either SMH or QQQQ attempt to rally to new highs today without first having at least a small correction by time.

Open ETF positions: Short XME, EWO (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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