On Tuesday, the major indices were poised for a rally by gapping up above key resistance levels, but they promptly sold off and closed in the red. Yesterday's action was the opposite. Stocks opened weak, below pivotal support levels, but reversed to finish the day higher. The Dow Jones Industrial Average rallied 0.7%, the S&P 500 0.8%, and the Nasdaq Composite 0.9%. Mid-cap stocks showed relative strength for a change, enabling the S&P Midcap 400 Index to advance 1.4%. The small-cap Russell 2000 was higher by 1.1%. All the main stock market indexes finished near their intraday highs, just as they settled near their intraday lows in Tuesday's session.
Perhaps the most notable element of yesterday's session is that the gains occurred on higher volume. Total volume in the Nasdaq rose 18% above the previous day's level, while volume in the Nasdaq ticked 4% higher. The gains on higher volume enabled both the S&P and Nasdaq to score a rare "accumulation day," indicative of institutional buying. Turnover in the Nasdaq moved back above average levels for the first time in weeks. NYSE trading remained below its 50-day average level.
It certainly has been choppy over the past several days, but we warned that indecision is common when the major indices are forming a tightening "wedge" pattern on their daily charts. Just as traders were faked out by Tuesday's opening gap above the "upper channel" resistance that failed to hold, many were equally sucked in to the bearish side of the market with yesterday's opening gap down.
Because of such indecision over the past several days, we made a judgement call yesterday morning to significantly tighten the stops in both the UltraShort S&P 500 ProShares (SDS) and UltraShort Financials ProShares (SKF) when the broad market began to reverse its opening weakness. Fortunately, this enabled us to promptly "scratch" both trades when they moved above our daily downtrend lines. We expected downside resolution of the "wedge" pattern, but it may not happen yet. On both sides of the market, erring to the cautious side in the current market environment is clearly the safest bet.
Though we broke even on both SDS and SKF, we sold our long position in the U.S. Natural Gas Fund (UNG) for a gain of nearly 10% since our entry on February 8. Like many of the commodity ETFs, UNG has seen strong upward momentum over the past week. Still, resistance of its prior high from November 1 provided a logical point to take our profit by selling into strength of the opening gap. This enabled us to exit near yesterday's high, rather than trailing a stop and risking sitting through a pullback:
Just as we have successfully done on numerous occassions since the broad market's downtrend began last October, we have no problem with jumping back on the long side of the market and profiting from momentum of countertrend bounces. However, we first want some proof that the market has made up its mind in the near-term. Specifically, we are looking for firm closing prices above the February 13 highs (to buy) or below yesterday's lows (to sell short) on charts of the major indices. For maximum simplicity and accuracy, simply draw a rectangular box around the recent range of the S&P 500, as we have done on the daily chart below:
Failing to wait for confirmed closing prices above or below these pivotal levels before buying new positions could easily lead to churning one's account. Based on what the market has shown us so far this week, one must be cognizant of the risk of overtrading without the market first confirming the direction of its next move. We're now flat because we obviously want to avoid that. As soon as we regain confidence that the choppy, sloppy times have passed, we'll be ready to jump back in the market in the direction of the near-term trend. Remember that profesional traders always trade what they see, not what they think!