As anticipated, stocks took a "pause for the cause" yesterday, trading in a relatively narrow range before finishing with mixed results. The major indices spent most of the day in negative territory, but a modest rally in the final ninety minutes of trading erased most of the losses and enabled a few sectors to close positive. The S&P 500 and Dow Jones Industrial Average registered matching losses of 0.2%, but continued strength in the tech arena helped the Nasdaq Composite to gain 0.2%. The small-cap Russell 2000 slipped 0.4%, as the S&P Midcap 400 finished flat. The main stock market indexes closed near their best levels of the day.
Trading eased significantly yesterday. Total volume in the NYSE receded 26% below the previous day's level, while volume in the Nasdaq similarly declined by 27%. It was the lowest volume day of the year in the NYSE. Turnover in that exchange has also limped in below average levels every day since the first of this month. Even though the S&P 500 scored three "accumulation days" of higher volume gains last week, volume was lighter than average in every one of those sessions. The balance of power clearly remains with the bulls for now, but we've yet to see overly convincing participation by mutual funds, hedge funds, and other "big money" players. Sharp surges in total market volume is the undeniable footprint of institutional trading activity. Unfortunately, such action has been absent from the NYSE throughout this month's rally. Last Friday was the sole day of above average volume the Nasdaq has had this month.
In yesterday's commentary, we pointed out the convergence of resistance levels on the daily charts of both the S&P 500 and Nasdaq Composite. We also mentioned that additional resistance of the long-term weekly downtrend lines looms overhead as well. As such, let's take a look at those primary trendlines on the weekly charts. We'll begin with the weekly chart of the benchmark S&P 500. Horizontal price resistance of the February highs, shown in the daily charts yesterday, is also shown on the weekly chart below (the dotted red horizontal line). Note the usual moving averages have been removed so that the downtrend line can be more easily seen.
As you can see, the S&P has been in a primary downtrend since last October. The bearish reversal at the peak began after the index formed a double top at resistance of its all-time high that was set back in March of 2000. Throughout the first two weeks of October 2007, the S&P probed less than 2% above its March 2000 high, promptly ran out of gas, then began the downtrend that has been intact for the past six months. Based on the first anchor point of the primary downtrend line (the "lower high" set last December), current resistance of the six-month downtrend line is around the 1,417 area. Obviously, the downtrend line will continue to close in on the price of the S&P as the index trades sideways. Next, take a look at the weekly chart of the Nasdaq Composite:
The chart of the Nasdaq is similar to the S&P, with a few notable exceptions. Rather than beginning its downtrend in October of 2007, the Nasdaq's high was formed in the first week of last November. The peak of the Nasdaq is also much different; the S&P 500 was testing resistance of its historical high, but the Nasdaq Composite was still nearly 50% off its amazing high set in March of 2000. Presently, resistance of the Nasdaq's primary downtrend line is around the 2,460 level. Finally, let's assess the weekly chart of the Dow Jones Industrial Average:
When the Dow formed its peak last October, the index was trading a whopping 20% above its prior historical high from January of 2000. Clearly, the Dow has showed the most long-term relative strength of the major indices since the year 2000 to 2002 bear market formed a bottom in October of 2002. Nevertheless, the current long-term downtrend of the Dow is technically just as weak as that of the S&P 500 and Nasdaq Composite. Resistance of the Dow's six-month downtrend line is currently near the 13,000 level, not far above yesterday's closing price. The Dow is the only major stock market index that has already rallied above resistance of its prior highs from February of this year.
In the April 2, 2008 issue of The Wagner Daily, written after the broad market broke out the previous day, we said the following, ". . .we now believe a broad-based intermediate-term uptrend will indeed materialize. Although we expect continued strength for at least the next three to six weeks, don't forget we're still in a primary bear market. Take advantage of the strength while it lasts, but just remember the new intermediate-term uptrend is still within the context of a long-term downtrend."
Since our April 2 commentary above, stocks have indeed been rallying and we have realized decent profits on the long side of the market. The reason we suggested strength for "at least the next three to six weeks" was due to resistance of the downtrend lines from the October 2007 highs. It's already been three weeks, and it probably won't be more than another one to two weeks until the major indices bump into those downtrend lines. That's why we suggest strength for at least three to six weeks. A brief probe above resistance of their downtrend lines is to be expected, as specialists and market makers will want to grab the but stop orders just above the downtrend lines. But the big question is whether the downtrend lines will thereafter "do their thing" to trigger a resumption of the downtrends that have been in place for the past six months. Until the market proves otherwise, we must assume the already established downtrend will remain intact. Be on the lookout for the major indices to soon test key resistance of those downtrend lines.