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February 2010 lows may lead to tradeable bounce - May 25, 2010

|Includes: SPDR S&P 500 Trust ETF (SPY)

Trading in a narrow, sideways range, near the previous day's highs, stocks spent most of the day trying to build on the previous day's bounce, but a wave of selling in the final hour caused the major indices to finish substantially lower. The Nasdaq Composite lost 0.7%, the Dow Jones Industrial Average 1.2%, and the S&P 500 1.3%. The small-cap Russell 2000 fell 1.3%, as the S&P Midcap 400 slid 1.0%. Yesterday's decline caused the Dow to give back all of its May 21 gain, while the rest of the major indices retraced a vast majority of last Friday's gains. All the main stock market indexes closed at their lows of the day, but squarely above the prior session's intraday lows.

Turnover retreated significantly from the previous day's levels, which were inflated by last Friday's options expiration. Total volume in the NYSE ticked 42% lower. Trading in the Nasdaq similarly receded 39%. In both exchanges, volume slipped back below 50-day average levels. Though it could be considered positive that lighter turnover accompanied yesterday's decline, such action is a common trait of bear markets. They frequently fall on their own weight, due more to a simple lack of buying interest than heavy selling pressure. Market internals were negative, but not as ugly as we've seen in recent down days. In both exchanges, declining volume exceeded advancing volume by a margin of approximately 3 to 1.

In the pre-market, the S&P and Nasdaq futures are trading more than 2% lower this morning. If the negativity persists into the open, the major indices will open below their respective intraday lows of May 21. Since that session was a bullish reversal attempt, a move below that day's opening lows would be rather negative on a technical level. However, the potential silver lining of such a decline is that stocks will now come into key, horizontal price support of their February lows, which are also the lows of 2010. We have highlighted major support of the February 10 lows on longer-term weekly charts of the S&P 500, Dow Jones Industrials, and Nasdaq Composite below:

SPX

DJI

COMPX

In yesterday's commentary, we pointed out the near-term resistance levels one might expect the S&P 500 to bounce to, if stocks followed through on last Friday's bullish reversal attempt. But the operative word was "if." Since there was no follow-through, or at least healthy price consolidation near the prior day's highs, the major indices may attempt to make another leg lower before bouncing substantially.

Although support of the February 2010 lows, shown on the charts above, may generate enough buying interest to at least temporarily put the brakes on the market's slide, there is now a plethora of overhead supply that needs to be absorbed in order for stocks to make a meaningful move higher. Still, we believe the most likely intermediate-term market trend is for stocks to enter into a sideways range, perhaps with the February 2010 lows as lower channel support, and the 50-day moving averages as upper channel resistance. With stocks not likely to move significantly higher for at least several months, but already having fallen sharply in a very rapid period of time, the possibility of entering into a lengthy range-bound period makes sense. We'll be watching closely for any ETFs that act well and could provide a tradeable bounce off support of the broad market's February 2010 lows. After stocks start bouncing into their overhead resistance levels, the overall reward/ratios would again start favoring the short side of the market. As short-term technical traders, we have no problem playing both sides of the market, but we prefer to let volatility settle down a bit before confidently coming out of capital preservation mode.


Open ETF positions:

Long - SLV, UNG
Short (including inversely correlated "short ETFs") - (none)

 
The commentary above is an abbreviated version of a daily ETF trading newsletter, The Wagner Daily. Regular subscribers receive daily updates on all open positions, as well as new ETF trade setups with detailed trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or text message, on as-needed basis. For your free 1-month trial to the full version of The Wagner Daily, or to learn about our other services, please visit morpheustrading.com.

Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also 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. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to deron@morpheustrading.com.



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