Broad Market Analysis - Prepare for a tug-of-war in the stock market
Stocks snapped their recent winning streak yesterday, as the major indices sold-off firmly on increasing volume. After opening flat, the broad market trended steadily lower throughout the morning, retraced more than half of the losses at mid-day, then resumed the downtrend and broke down to new lows in the afternoon. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each shed 0.7%. The small-cap Russell 2000 lost 0.8% and the S&P Midcap 400 fell 0.6%. A bounce in the final hour of trading lifted the major indices off their worst levels, but they each still finished in the bottom 25% of their respective intraday ranges.
Turnover rose across the board, causing both the S&P and Nasdaq to register bearish "distribution days." Total volume in the NYSE increased by 17%, while volume in the Nasdaq was 7% higher than the previous day's level. Negative market internals confirmed the losses. In both exchanges, declining volume exceeded advancing volume by a ratio of approximately 5 to 2. In the April 10 issue of The Wagner Daily, we said the following about the April 9 action in the Nasdaq, ". . . the day was indicative of "churning" that occurs when an index registers higher volume without a significant advance or decline in price. When this happens at the top of a range, it is a warning signal that often precedes institutional selling a day or two later." As anticipated, heavy selling by mutual funds, hedge funds, and other institutional traders occurred yesterday, two days after Monday's "churning."
Also in our April 10 commentary, we cautioned that "it only takes one day of institutional selling (aka "distribution day") to undo a week's worth of gains that occurred on declining volume." This is exactly what happened yesterday, except that "only" four days of gains in the S&P and Dow were wiped out. Obviously, yesterday's session was decisively bearish and reversed the short-term trends of the major market indexes from "up" to "down." However, the major indices have quite a bit of technical support below yesterday's closing prices that may make it difficult for them to go much lower without continued institutional selling pressure. First, take a look at the daily chart of the Nasdaq Composite:
The Nasdaq closed just above a multiple convergence of price support. As the chart illustrates, key support levels consist of: the primary uptrend line (the dashed blue line), the prior highs from March (the red horizontal line), and convergence of the 20-day EMA with the 50-day MA. Notice how the primary uptrend line also lines up with convergence of the 20-day EMA and 50-day MA. Yesterday's bearish action combined with the numerous levels of support could lead to a volatile tug-of-war between the bulls and bears, so be prepared for erratic and indecisive action over the next few days. The bulls may still be in control, but a firm close below the 2,441 level would tip the balance of power back to the bears.
The daily charts of both the S&P 500 and Dow Industrials are similar to the Nasdaq. Both indices finished just above support of their primary uptrend lines and near their prior highs from March. In both indexes, convergence of the 20-day EMA and 50-day MA lie just below. For the Dow, a close below 12,435 would likely lead to significant selling, while the S&P still has a way to go before breaking support of its 50-day MA (1,427). Below are annotated charts of both indices:
All three of our open positions are starting to look pretty good. The StreetTRACKS Gold Trust (GLD) continues to lazily grind its way higher, so we continue to trail a stop as well. Since our entry, it is showing a gain of approximately one point. We also remain short the iShares DJ Real Estate (IYR), which we pointed out a few days ago as having major relative weakness to the broad market. When an ETF is so weak that it only moves sideways while the major indices are rallying, it typically is suffers a significant loss when the broad market eventually pulls back. That is what happened to IYR, which fell 1.3% yesterday (nearly double the loss of the S&P 500). The short trade is taking longer to follow-through than originally anticipated, but the pattern remains bearish. Finally, we are long the ProShares Ultra Short Russell 2000 (TWM), which is inversely correlated to the price movement of the Russell 2000 Index, and at a ratio of 2 to 1. Though we only looked at charts of the S&P, Nasdaq, and Dow, the Russell has actually shown more relative weakness than all three of those indexes.
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In this column, MTG presents you with a FREE, actual trade setup that we are stalking for entry at some point during the week. Note that, unlike the daily guidance that regular Stalk Sheet subscribers receive, this free Stalk of the Week does not take into account overall broad market conditions that can easily affect the trade over the next several days. This week's play is:
Last week's Stalk of the Week, SPWR long, triggered on April 4. It closed at a new all-time high yesterday and is currently showing an unrealized gain of just over 2 points. We remain long and will be trailing a stop to lock in profits as it moves higher.
Click to receive your free 1-month trial to The MTG Stalk Sheet so that you can receive an average of one to three trade ideas such as this one on a daily basis (limit one free trial per household). Subscribers are always provided with detailed entry, stop, and target prices for each trade, and intraday e-mail alerts are sent as needed.
Below is the weekly commentary that accompanied this week's updated ETF Trend Tracker that was e-mailed to subscribers at the beginning of the week. The Morpheus ETF Trend Tracker, a perfect supplement to the ETF Roundup guide, is a comprehensive table of Exchange Traded Funds (ETFs) designed for informed investors and longer-term traders who prefer to hold their ETF positions for a few weeks to several months at a time. Based exclusively on a weekly analysis of trendlines on the daily and weekly charts, the ETF Trend Tracker provides subscribers with a thorough snapshot of the primary trend direction of ETFs in every category from broad-based to industry sector to international. This information is e-mailed to subscribers weekly, in a user-friendly format that groups ETFs based on the direction of their primary trends.
Commentary:The market segment ETFs worked themselves higher steadily throughout last week, albeit on the declining volume typical of holiday weekends. The large and mid-cap stocks performed better compared than small-caps. Many industry sectors are setting up to reverse to the "ascending trend" list, but the major indices remain at pivotal resistance levels. We understand that most traders favor entering long positions as opposed to selling short, so we'll be watching for solid opportunities of ETFs that reverse their descending trends.
The IPO specialty ETF (ticker FPX) triggered into the "ascending trend" list. Medical-related industries such as Biotech (BBH), Pharmaceuticals (PPH), and Healthcare (XLV) trended steadily higher last week. We are seeing signs of institutional rotation into these conservative sectors. Coinciding with the defensive rotation, Utilities (XLU) and Energy (XLE) also headed higher. On the downside, watch out for the Real Estate Sector (IYR), as we noticed a mini "heads and shoulders" pattern developing. At the current price point, there are two "swing high" resistance levels above the current price, and two "swing low" support levels below. Fixed-income (bond) ETFs trimmed lower and are mostly setting up to reverse to the descending trend.
International sectors remained bullish. A handful of these ETFs moved into the "ascending trend" list last week. Several headed into new high territory, while those ETFs already in the ascending trend extended their gains. All the sectors in the "descending trend" list are feeling the prolonged pain after the meltdown a few weeks ago, but only for those still holding any short positions. ETFs such as iShares China (FXI) initially set up nicely for short-sales into resistance, but have moved above their resistance levels and stopped traders out.
Remember that you can always create an alert list for yourself using the data in the MTG Stop (S1) column and/or the Reversal Stop (S2) column. By having your personal ETF watchlist with alerts, you will be able to act quickly mid-session to execute a trade, without waiting for this report at the end of the each week. Although we work in a dynamic time frame, our initial risks are set in such a way that we will usually not be knocked out of the position within a short period of time, such as in less than five trading days. At times, we give a lot of wiggle room for certain ETFs, but other times we are very aggressive and squeeze our stops tightly to the current price. We always focus on the best risk/reward for our subscribers that the market conditions give us. Keeping consistent is the goal because the market is dynamic like waves of an ocean. It never stops moving in both directions. Our data could be presented every 5 minutes, daily, weekly, or monthly, but it can only be a snapshot of what's going on across the board.
Alert of imminent reversal to the upside:Click to receive your free 1-month trial to the ETF Trend Tracker (limit one free trial per household), which will be e-mailed to you every week, along with intra-week updates on an as-needed basis.