Broad Market Analysis - The Nasdaq broke its 20-day EMA. . .now what?
Another intraday battle between the bulls and bears led to an erratic, volatile session yesterday, as most of the broad market gave up early gains to finish lower. The Nasdaq Composite showed a gain of 0.4% at its morning high, but reversed to a 0.8% closing loss in the afternoon. The S&P 500 similarly surrendered a 0.7% intraday gain to finish 0.1% lower. Like the previous day, the Dow Jones Industrial Average managed to keep its head above water while the other major indices posted losses. The blue-chip index advanced 0.3%. In keeping with the recent pattern, small-caps lagged behind. The Russell 2000 Index fell 1.0%, though the S&P Midcap 400 declined only 0.4%. Overall, yesterday's action was much like the previous session. Stocks got off to a good start, but reversed into negative territory in the afternoon. Both days, the Nasdaq and Russell 2000 showed the most relative weakness, while the large-cap Dow was the only index to close higher. The interesting divergence between the key stock market indexes continues to persist.
The most negative factor of yesterday's session was that turnover ticked higher across the board. Total volume in the NYSE increased by 18%, while volume in the Nasdaq finished 10% above the previous day's level. The losses on higher volume caused the S&P 500 to register its second "distribution day" within the past three weeks, but it was the Nasdaq's fourth such day of institutional selling in the same period. Worse is that two of the Nasdaq's four "distribution days" have occurred within the past three days. Even the healthiest of markets rarely sustain their uptrends when five or more days of institutional selling present themselves within a four week period. Clearly, the Nasdaq is progressively looking worse than the S&P and Dow. Declining volume in the Nasdaq exceeded advancing volume by a margin of 4 to 1. The NYSE ratio was negative by less than 3 to 2.
As we have been focused on for the past several days, the Nasdaq Composite broke support of its 20-day exponential moving average yesterday. This also correlated to a confirmed break of its primary uptrend line, which is illustrated on the daily chart below:
The Nasdaq's confirmed close below the 20-day EMA is its first significant correction since the index began trending higher, off its March lows. Further, the weakness has also been confirmed by four recent days of institutional selling, two of them only appearing in the last two sessions. On any broad market rally attempt in the coming days, expect both the 20-day EMA and prior uptrend line to act as significant resistance levels. Next support for the Nasdaq should be found at the May 1 low of 2,510. Below that, the pivotal 50-day MA is currently at 2,476.
The Russell 2000 is the only other major broad-based index that is also trading below its 20-day EMA. Recent relative weakness in the small-cap arena has caused the index to look even worse than the Nasdaq. After failing to follow the other major indices to a new high earlier this month, the index immediately fell victim to selling pressure. It has spent most of the past week below its 20-day EMA, and is now within close proximity of its 50-day MA. Watch the action in this index as it tests the 50-day MA over the next several days:
Historically, growth-oriented small-cap stocks have led the stock market in both directions, but the S&P and Dow have been bucking the trend. The S&P 500 briefly popped to a new high on an intraday basis yesterday, but the index finished lower, forming an "inverted hammer" candlestick in the process. As you can see on the chart below, the S&P 500 closed 11 points above its 20-day EMA. We anticipate a test of that support level within the next few days, but it has a much better chance of holding than the Nasdaq did:
As for the amazing Dow, it actually finished yesterday at another record high. However, it too formed an "inverted hammer" candlestick. When this pattern forms near the upper channel of an extended uptrend, it often leads to selling in the days that follow. Given what we've seen in the Dow lately, we certainly would not bet the bank on that idea. Nevertheless, a bit of caution, even in the large-caps, would be prudent.
Our only open position remains the StreetTRACKS Retail (XRT) short. So far, it's working out well and showing an unrealized gain of just under 2%. Relative weakness in the Retail Index ($RLX), which is now trading below its 50-day moving average, has generated decent short setups in the retail sector. As for longs, the Pharmaceutical HOLDR (PPH) that we discussed in yesterday's Wagner Daily did not yet hit our trigger price. We continue stalking it for potential long entry above its hourly downtrend line.
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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 setup is:
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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 stock market saw some volatility into the end of last week, but finished mostly unchanged. One negative observation was that the volume of the bearish high-volatility day (Thursday) was higher than the bullish high-volatility day (Friday). This points to a bit of institutional distribution, but there is no immediate cause for concern unless the S&P and Nasdaq post several more such days in the coming weeks. Small-Caps (IWM) remain flat and are showing relative weakness to the broad market. The large-cap indexes such as the Dow Jones Industrials (DIA) are still in the spotlight, but it's unfortunate that the Dow garnishes so much media attention because it often misrepresents the actual strength of the broad market. Keep tabs on the other Market Segment ETFs in this week's updated ETF Trend Tracker report. For now, we are holding Market Segment stops at their current prices, pending how the market responds to the increased volatility in the coming days.
Biotechs (BBH) fell apart and hit the MTG Stop (S1) before moving below the entry trigger. Internets (HHH) weakened and have almost filled the gap up from the previous week. Consumer Staples (XLP) also dropped lower and hit the MTG Stop, but it has been in the "ascending trend" list since November 2005. From its triggered entry until last week's stop was hit, XLP gained 15% on its ascending trend. Financials (XLF) seem to be backing down from the resistance level, and a short re-entry here exhibits relatively limited risk. Retail (RTH) also continues to show relative weakness.
Bond ETFs remained quiet and are consolidating.
Hong Kong (EWH) leaped higher, breaking out above significant horizontal price resistance. Similarly, China (FXI) also closed the week strong and is now testing its all-time high that was set in December of 2006. Europe (FEZ) fell into the "descending trend" list, but most of the other international markets performed well.
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.