Stocks resumed their bearish behavior yesterday, as the major indices surrendered their previous day's gains. After trending steadily lower throughout the entire day, the S&P 500 lost 1.3%, the Dow Jones Industrial Average 1.4%, and the Nasdaq Composite 1.7%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 2.3% and 1.6% respectively. Choppy action in the final hour of the session kept traders on their toes, but all the main stock market indexes eventually settled near their intraday lows.
Total volume in the NYSE was 1% lower than the previous day's level, while volume in the Nasdaq ticked 3% higher. The losses on higher volume caused the Nasdaq to register a bearish "distribution day," but turnover remained below average levels for the fifth straight day. Market internals were ugly. Declining volume in the NYSE outpaced advancing volume by a margin of 5 to 1. The Nasdaq ratio was negative by 4 to 1.
As was the situation at the beginning of this month, the S&P 500 again reversed lower after testing resistance of its 20-day exponential moving average. This is shown on the daily chart below:
Along with the S&P 500, both the Nasdaq and Dow also reversed after testing their 20-day EMAs yesterday. In strongly uptrending markets, the 20-day EMA often acts as the first line of defense to provide substantial price support and enable a resumption of the primary uptrend. Not surprisingly, the opposite is also true in downtrends. Many investors sell into resistance of the 20-day EMAs in bear markets, while traders also use that level as a low-risk entry point on the short side. If the S&P happens to pop above yesterday's high and close above its 20-day EMA, it would be a rather bullish signal for the overall market. However, unless that happens, we must assume the index will resume its long-term downtrend that has been in effect since last October. One could reasonably expect a test of the February lows, and perhaps even the January lows, sometime next week.
In yesterday's Wagner Daily, we said that "Because the market's recent gains have lacked the confirmation of accumulation by mutual, hedge, and pension funds, this week's rally remains highly suspect. When a market rallies on lighter than average volume, it only takes one day of institutional selling to wipe out many days of gains. With the stock market clearly stuck in an overall downtrend, there are pretty good odds of another day of institutional selling coming along shortly." The bearish price action that followed in yesterday's session was a clear example of this. Only the Nasdaq sold off on higher volume, but notice it didn't take a lot of selling pressure in the overall market to wipe out the prior day's significant gains.
Although short-term bounces can certainly be played along the way, the market has not yet given us any clear signs that the worst is behind us. Until we begin seeing the necessary support of institutional buying, along with the breaks of key resistance levels, it remains a risky proposition to be on the long side of the market within the context of both intermediate and long-term downtrends. It may be a corny and worn-out Wall Street cliche, but it will serve you well to remember that the trend really is your friend!
NOTE: The U.S. stock market will be closed on Monday, February 18 in honor of the President's Day holiday. As such, The Wagner Daily will not be published that day, but regular publication will resume the following day. For those of you heading to the New York Trader's Expo, I look forward to meeting you after my presentation on ETF trading.