Broad Market Analysis - Stocks sold off, but. . .
The major indices opened lower for the third consecutive day, but this time they failed to subsequently recover. Conversely, stocks fell into a steady downtrend throughout the entire session. With two hours remaining, the market began to find support and reverse off the lows, but the rally attempt failed. Stocks suffered another leg down into the close, causing the broad-based indexes to finish near their intraday lows. The Nasdaq Composite fell 1.7%, the S&P 500 lost 1.4%, and the Dow Jones Industrial Average dropped 1.1%. The small-cap Russell 2000 and the S&P Midcap 400 were lower by 1.9% and 1.4% respectively.
Although yesterday's losses were quite substantial, the one bright spot is that turnover was mixed. Total volume in the Nasdaq rose 7%, causing the index to register a bearish "distribution day," but volume in the NYSE actually came in 2% lighter than the previous day's level. This indicates that institutional investors were not aggressively dumping shares in the S&P and Dow. Considering the amazing relative strength that blue chips have demonstrated over the past several months, it was not overly surprising that volume in the NYSE tapered off when the market moved lower. Nevertheless, market internals were ugly! In both exchanges, declining volume exceeded advancing volume by a ratio of approximately 7 to 1. This was also confirmed by the selling being widespread to every major industry sector.
On a technical level, yesterday's losses were not as damaging as one might initially be inclined to think. All the major indices slipped more than 1%, but the losses were not catastrophic compared to the market's gains over the past several weeks. Of the "big 3" stock market indexes, only the Nasdaq closed below both support of its uptrend line from the March low and its 20-day exponential moving average. Because they were riding along the top of their uptrending channels, both the S&P and Dow conversely remain above support of their uptrends. This is illustrated on the daily charts below:
The indices' proximity to their 20-day exponential moving averages (the beige lines on the charts above) is significant because many swing traders buy uptrending stocks and ETFs when they pull back to their 20-day EMAs. Obviously, it's too early to predict whether or not yesterday's losses will mount in the coming days, but one's bias in the NYSE should stay neutral to moderately positive unless the S&P and Dow break support of their uptrend lines and 20-day EMAs. This viewpoint is further confirmed by the fact that volume in the NYSE receded slightly during yesterday's sell-off. The Nasdaq, however, may be another story. Take a look:
Unlike the S&P and Dow, the Nasdaq broke support of its primary uptrend, as well as its 20-day EMA. However, a one-day probe below key support levels is never enough to confirm a reversal. In a strong market, stocks and indexes frequently dip below closely-watched support levels for a day or two, only to snap back after the "weak hands" have been shaken out at the lows. Clearly, the technical picture of the Nasdaq is worse than that of the S&P and Dow, but not yet negative enough to declare an end of the intermediate-term uptrend. This, of course, could rapidly change if losses multiply over the next several sessions. Finally, keep a close eye on the performance of small and mid-cap stocks, which have lagged their large cap peers in recent months. If they begin to fall apart, it will undoubtedly weigh on the broad market.
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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.
There is no Stalk of the Week this week, as we first want to assess whether or not the market follows through on yesterday's weakness. If the correction continues in an orderly fashion, it will present many nice long setups in the coming weeks.
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 major stock market indexes continued posting new highs last week, pushing most of the Market Segment ETFs to new highs as well. The laggard small-cap Russell 2000 (IWM) was the exception. IWM struggled a bit and is the only broad-based ETF that still remains below its prior high from February. Due to short-term weakness at the beginning of last week, several MTG Stops (S1) were hit. This also caused a widespread adjustment to our Stops. Please review the latest ETF Trend Tracker report for updated information. The Internets (HHH) gapped up firmly, extending the gains on its recent run. Oil Services (OIH) made new highs, despite a drop in US Oil (USO). Semiconductors (SMH) is holding above the pivot of its breakout of a 6-month range, while several financial ETFs, such as XLF, are shaping up for potential breakout. Real Estate (IYR) has been flat and range bound, so consider avoiding ETFs demonstrating such action. On the downside, Retail (RTH) was one of the weakest sectors. The IPO index (FPX) actually hit our reversal stop twice last week, which means it is back on the "ascending trend" list, but we are more cautious now because it has a tendency to trade in a wide range. This is a characteristic we label as being "Choppy".
Bond (fixed-income) ETFs remained quiet and were relatively unchanged for the week.
The International sector participated in last week's rally, enjoying similar gains to our domestic markets. The Asian, Latin American, and European ETFs closed the week strong. Watch our stop placements carefully, as several are placed very tight to the current price in order to protect gains. Any sudden weakness may also trigger reversals in trend. All tickers in the "ascending trend" list are making gains.
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.