Broad Market Analysis - How far will the S&P 500, Nasdaq, and Dow bounce?
Mirroring the previous day's action, the major indices chopped around in a sideways range throughout most of the day before a round of late-day buying pushed stocks into the plus column. The main difference was that yesterday's session was less volatile. Strength in the Biotech sector helped the Nasdaq Composite lead with a 0.9% gain. The Dow Jones Industrial Average, small-cap Russell 2000, and S&P Midcap 400 indices all trailed closely behind with identical gains of 0.8%. Only the S&P 500 showed relative weakness by advancing just 0.4%. Each of the broad stock market indexes settled in the upper third of their intraday ranges.
Unfortunately for the bulls, volume once again failed to confirm the rally. Total volume in the NYSE fell 25% below the prior day's level, while volume in the Nasdaq receded 15%. Higher turnover to accompany yesterday's gains would have indicated the return of institutional buying interest, but it's not surprising that trading remained subdued on the upside. Such is the usual situation in weak markets. Despite the broad market's decent price gains, market internals were not that impressive. In both exchanges, advancing volume exceeded declining volume by a margin of less than 2 to 1.
Since the S&P, Nasdaq, and Dow are all holding and bouncing off the key support levels illustrated in the July 30 issue of The Wagner Daily, let's take a look at how far the current retracement is likely to carry the major indices before running into significant resistance levels. Along with overhead 20 and 50-day moving averages, the use of Fibonacci retracements is an easy and accurate way of projecting major levels of resistance. Let's begin by looking at the weakest of the three indexes, the S&P 500:
For the S&P, the area between the 38.2% and 50% retracement level will provide significant resistance of the prior lows from June. Remember that a prior support level (the June lows) becomes the new resistance level after the support is broken. The 20-day EMA will provide resistance just above the 50% retracement level, while the 50-day MA is not far above the 61.8% retracement level. With the convergence of so many technical resistance levels in the same area, it would obviously require an abundance of institutional accumulation for the broad-based S&P 500 to rally much beyond the 38.2% to 50% retracement level in the short-term. If the index reverses and heads back down, the 200-day MA of 1,450 and the August 1 low of 1,439 will both provide support. Next, take a look at the Nasdaq Composite:
The chart of the Nasdaq has not suffered as much technical damage as the S&P 500, but it still must contend with overhead resistance of its 20 and 50-day MAs. As you can see, both moving averages also happen to converge perfectly with the 50% Fibonacci retracement. As such, the 2,620 level will act as major support for the index. If the Nasdaq approaches this level, consider selling long positions into strength and/or initiating new short positions in any stocks or ETFs with relative weakness to the Nasdaq. Curiously, the Dow has the same confluence of resistance as the Nasdaq:
At the 13,577 level, the 20 and 50-day moving averages both converge with the 50% Fibonacci retracement level of the Dow. Like the Nasdaq's 50% retracement, be prepared to sell long positions into strength and/or initiate short positions if/when the index tests this level.
With strong closes in the market over the past two days, the time is not quite right to heavily add new short positions, but it's not wise to be loaded up on the long side either. As we have been stressing the past few days, long positions should be restricted to those with a short time horizon of only 1 to 3 days, just to capitalize on momentum from the current bounce. Until the market proves otherwise, profitably holding beyond that term will prove challenging. If the major indices test the resistance levels shown above and begin to falter, we'll be prepared with new short entries tomorrow. Until then, we are laying low, selectively playing short-term moves on the long side, but with fingers hovering over the sell button.
If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.
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:
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 the most recent ETF Trend Tracker, e-mailed to subscribers last weekend. 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:After a week of chop and indecision, the bears unequivocally took control of the stock market last week. Most of the major indices rapidly lost about 3 months of gains, and there are not yet any technical signs that the bulk of the selling may be finished. The weak close in last Friday's session may lead to further distribution in the coming week, as mutual, pension, and hedge funds will be forced to adjust in order to meet their clients' demands. Nevertheless, strict adherence to our pre-determined stop prices in last week's ETF Trend Tracker would have prevented you from realizing substantial losses.
With the exception of the Nasdaq-100 (QQQQ), all the broad-based Market Segment ETFs have moved to the "descending trend" list. When the S&P Midcap (MDY) hit last week's MTG Reversal Stop (S2), our trailing stop strategy enabled us to lock in a gain of more than 16% since triggering to the "ascending trend" nearly 11 months ago. A small gain was also realized on the DJ Industrials (DIA). Further, initiating short positions on the Market Segment ETFs when they hit their Reversal Stops would have generated profits that more than made up for any ETFs that netted a loss on the long side. The weakest of the broad-based ETFs, the Russell 2000 (IWM), is already showing a downside gain of nearly 6% since triggering to our "descending trend" list on July 24.
About half of the Industry Sectors dropped to the "descending trend" list. This week's ETF Trend Tracker includes updated stops, charts, and commentary. Leading the bearishness was the Real Estate sector (IYR), extending its downside gain to nearly 15% since mid-May. Consumer Discretionary (XLY) led the latest group of downside trend reversals, as it is already showing a short-side gain of nearly 4.5%. It is important to notice the sector grouping of ETFs when trend reversals occur.
New to the Specialty sector of ETFs is the PowerShares Clean Energy (PBW), which includes several of the red-hot solar energy stocks. Due to subscriber demand, we will be introducing additional ETF tickers in the coming weeks, including many of the "UltraShort" sector ETFs that enable traders to profit from buying ETFs in a bearish market.
The Short-term bond ETF (SHY) traded higher and is now in the "ascending trend" list. Corporate bonds (LQD) were flat and remain depressed. Other fixed-income ETFs headed higher last week and are near their entry triggers.
The International Sector did not escape the carnage. About half of the International ETFs landed in the "descending trend" list. On balance, European ETFs suffered the most. Fortunately, we had already tightened several stops in last week's report in order to preserve our gains and reduce risk. Determining the fine balance between letting gains run and preserving profits is always tricky. Nothing anyone can put into a computer code or program can give such dynamic trend tracking capabilities. On the "descending trend" list, you will notice that many of the MTG Stops (S1) are a bit farther away than usual. This should allow for some upside volatility if value traders jump in this week. A few of the Reversal Stops (S2) are set very far away from the current price and trigger. Be sure to account for this when determining your position size and risk exposure. Taking a smaller position can offset higher risk. If the market bounces this week, we will keep tabs on whether or not it has legs. If necessary, we will send an e-mail alert to inform you of any substantial changes.
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.