Following through on Monday's weakness, stocks suffered a damaging round of broad-based losses yesterday. After gapping lower on the open, the major indices moved steadily lower throughout the morning, consolidated near their lows at mid-day, then plunged to new lows in the final hour of trading. The S&P 500, Nasdaq Composite, and S&P Midcap 400 indexes each plummeted 2.4%, while the Dow Jones Industrial Average fell 2.1%. The small-cap Russell 2000 lost 2.7%, maintaining its recent relative weakness. All of the main stock market indexes closed at their dead intraday lows.
Higher turnover accompanied yesterday's sell-off, but overall volume levels remained below average. Total volume in the NYSE rose 26% above the previous day's level, as volume in the Nasdaq similarly increased by 24%. The losses on higher volume caused both the S&P and Nasdaq to register a bearish "distribution day." But because Monday's turnover was so light, total volume in both exchanges still failed to exceed their respective 50-day average levels. Again, trading activity will probably remain lighter than average until the Labor Day holiday has passed.
Although turnover was lighter than average, market internals were simply atrocious. In the NYSE, declining volume trounced advancing volume by a whopping margin of 25 to 1! Specifically, the entire NYSE saw only 52.5 million shares of advancing volume and 1.34 billion shares of declining volume. This coincided with only 1 stock closing higher for every 7 that finished lower. The Nasdaq adv/dec volume ratio was better, but still firmly negative at just under 8 to 1.
Yesterday, we pointed out the strong breakouts in several of the Chinese ETFs and mentioned the possibility of buying them on a pullback to their breakout levels. However, yesterday's broad market weakness caused them to not only retrace to their breakout levels, but to pierce far below them as well. Falling nearly 8% yesterday, both the iShares Xinhua China 25 (FXI) and the SPDR S&P China (GXC) gave back their previous day's gains and then some. Now that both ETFs are in danger of failing their breakouts, all bets are off on the long side of the Chinese ETFs. This is not surprising because breakouts to new highs have a high rate of failure in weak markets. We warned of this in yesterday's commentary by saying that, "Nevertheless, caution is still required on the long side of even FXI and GXC. Selling pressure will certainly affect these ETFs if the domestic market starts heading back down towards it prior lows."
The two bearish positions we entered during last week's bounce are starting to pay off. The UltraShort S&P 500 ProShares (SDS), which we bought on August 23, gapped back above its 200-day MA yesterday and is now showing an unrealized gain of nearly 2 points. Since the Dow has been holding up better than the S&P 500, our long position in the UltraShort Dow 30 ProShares (DXD) is not doing as well as SDS. Still, it is now showing a gain of 1 point. Now that the broad market has made a substantial move lower, we also raised the stops on SDS and DXD in order to take some risk out of the trades. Subscribers should note the detailed stop prices listed below. If volatility tightens up, we will continue to trail the stops tighter in order to lock in gains. We also remain long the iShares 20+ year Treasury Bond Fund (TLT), which moved further into the plus column yesterday.
In the August 27 issue of The Wagner Daily, we said of last week's light volume rally that, "The problem with this scenario is that the entire week's gains can be wiped out by just one instance of institutional selling." That's exactly what happened when volume increased yesterday. Each of the major indices gave back all of last week's gains, and a bit more, within a single session. The S&P 500 broke below pivotal support of both its 200-day MA and prior downtrend line. The Nasdaq Composite did the same. Only the Dow remains above its 200-day MA, though one more day of selling would test its resolve.
The broad market's short-term uptrend that began with the August 16 low is essentially dead. In addition to the current intermediate-term downtrends, each of the major indexes have now entered short-term downtrends as well. From here, the next major levels of support are the prior intraday lows that were set on August 16. Since that session was a reversal day in which the main market indexes closed near their intraday highs, it would only take a break of the August 15 lows to set new closing lows for the month. If any one of the major indexes breaks down to close below its August 16 low, it will likely have broken its primary long-term uptrend as well. As evidenced by yesterdays' nasty market internals, overall odds clearly favor the short side of the market. At the very least, consider waiting in cash for the market's next attempt at stabilization. A double bottom near the August 16 lows is one such bullish scenario that might occur in the near future.
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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:
Due to yesterday's rapid sell-off, there is no Stalk of the Week this week. We are stalking several ETFs for short entry, but they have not yet triggered for short entry.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:Another new feature was added to the ETF Trend Tracker this week that identifies the risk of a mid-trend entry, relative to the last price and the MTG Stop (S1). This is useful for determining the percentage risk of a new position entry when the ETF has already reversed and is during the middle of its trend. Values in the "ascending trend" list show the percentage at risk if a position was entered at the last price and the price weakened to the S1 Stop. The concept is inversely the same for values in the "descending trend" list. We recommend using the more conservative MTG Stop (S1), rather than the Reversal Stop (S2), as the initial protective stop price if an ETF is entered mid-trend. Note that the S1 prices are seldom more than 7 to 8 percentage points away from the current last price of the ETF. This not only keeps our initial risk in check, but also preserves any gains and reduces the chance of "giving it all back." Additionally, the S1 allows us to scale back positions (selling partial share size) as the price action weakens.
Continuing their retracements off the August 16 lows, the major Market Segment ETFs scored solid gains and closed at their highest levels of the week. Last week's patterns completed "swing low" formations in several sectors and hit MTG Stops (S1) along the way. Bullish price action will also be testing Reversal Stops (S2), which is anticipated as ETFs attempt to migrate back into the "ascending trend" list once again. Energy (XLE) has already landed back in the "ascending trend" list. Typically, the first ETFs on the list have the highest relative strength and could be considered for long entry. Other ETFs will surely follow suit if the broad market retracement continues. Use the alerts listed at the bottom of this page to set up potential entries mid-week. Enter the current "S2" price in the ETF Trend Tracker report as your buy stop, for example, to prepare for new long entry.
The fixed income ETFs were mixed, as the short-term T-Bonds set new highs, but closed the week a bit off its high. The other bond ETFs moved up marginally higher for the week. The long term T-Bond (TLT) is ready for reversal soon.
International ETFs remained volatile, as several of them rallied significantly higher. Australia (EWA) gained almost 12% last week. Brazil (EWZ) and China (FXI) experienced similar gains. FXI triggered to the "ascending trend" mid-week and has already posted over a 4% gain since doing so. Hong Kong (EWH) has the most exposure to risk, close to 13%. It was also one of the last ETFs to enter the "descending trend" list.
Alert of imminent reversal to the upside: XLK, IYZ, SMH, TLT, EWCClick 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.