The Trader Daily

 | May 12, 2014 | 7:30 AM EDT  | Comments
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Stock quotes in this article:

spy

,

QQQ

,

IWM

,

DIA

,

XLU

,

xle

,

XLP

As we begin a new trading week and review our four major indices, we're faced with a situation that hasn't changed all the much over the past couple months. The SPDR S&P 500 Trust (SPY) and SPDR Dow Jones Industrial Average ETF (DIA) are still stuck in sideways consolidation or balance, while the Powershares QQQ Trust (QQQ) and iShares Russell 2000 ETF (IWM) are both trapped in short term downtrends.

The question everyone wants answered is this: will weakness in small caps (IWM/QQQ) drag larger cap companies lower (SPY/DIA)? Or will small caps stabilize while large companies take the reins and power higher?

Rather than guess at the ultimate outcome, I'll offer my view that the SPY, even if its ultimate direction is lower, will likely auction higher first. The fact that prices have been so well accepted between $184 and $189 (since late-February) leads me to believe that very few participants will be actively willing to sell this market short until they have some indication that limited (or no) demand resides above $189 to $190. Put another way, the SPY needs to rally higher before it can break lower.

In my view, an advantageous set-up for the active short seller would be a low-volume rally through $190. Followed by a higher volume reversal back beneath $186 to $188. For reference purposes, the most accepted price since early-October 2013 is now $187.75.

 

Daily Chart of Major Indices
eSignal

 

For those looking for the strength in this market, it's exactly where it's been for the past couple months. Demand remains intact for nearly anything in the REIT, utility, energy or consumer durable sectors. It is worth noting, however, that the Energy Select Sector SPDR Fund (XLE) reversed lower on Thursday, and the Utilities Select Sector SPDR Fund (XLU) has now established a slightly lower swing high.

Those looking for the next market leader that might stumble should focus on the Consumer Staples Select Sector Fund (XLP). A close back beneath Friday's low could easily trigger a corrective move back toward the XLP's 50-day simple moving average.

Daily Chart of Market's Four Strongest Sectors
eSignal

As far as which sectors traders continue to sell, home builders, consumer discretionary, select biotechs and select financials, and anything previously loved by the momentum buying crowd continues to drift lower.

 

Daily Chart of ther Market's Four Weakest Sectors
eSignal

 

When stock traders want to look at bonds, they generally pull a quote on the iShares 20+ Year Treasury Bond ETF (TLT). While this is a great and simple way to get an approximation of how longer duration bonds are performing, it's undeniably insufficient to gain a complete understanding of how fixed income is trading. While 30-Yr yields have been trading lower for several months, 10-Yr yields have traded generally sideways and 5-Yr yields have risen.

For those hell bent on selling short the TLT or 30-Yr bonds, I would encourage you to monitor both the daily Relative Strength Index (RSI) and 50-day simple moving average (SMA). As long as price is above the 50-day SMA and the RSI is reading above the 50-center line, the odds will remain stacked against you as you continue to fade the bullish price momentum.

 

Daily Chart of Fixed Income Yields
eSignal

 

I want to begin Monday's SPY trade prep with a quick review of how the ETF has traded since April 28 (the last minor swing low). The nearly perfect bell shaped curve on the composite volume profile (on the chart below) is a clear indication of a market that has found relative balance. Put another way, with $187.95 representing the fairest price point to do business since April 28 (the fattest part of the bell curve), and the SPY closing Friday's session at $187.96, there is virtually no edge in initiating a trade at Friday's closing price point for anyone other than the tick chasing scalper. In my view, the intraday swing trader or higher timeframe trader should be focused on either identifying acceptance above $189.05 or beneath %186, or fading the extremes of the composite profile.

 With the above in mind, Monday's primary areas of interest are expected to be $188.50 and $186.60. All trading between those two price points is expected to be choppy and rotational in nature. A sustained trade above $188.50 shifts our focus back to $189.05 and new swing highs. While failure to hold the line at $186.60 encourages day timeframe traders to sell the SPY down toward $186.05 and on to new (minor) swing lows.

 

15-Minute Volume Profile SPY
eSignal

 

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS

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