As anticipated, overhead resistance of the 50-day moving averages in the S&P and Dow weighed on the stock market yesterday. After gapping lower on the open, the major indices fell further in the first hour of trading, but stabilized and traded in a choppy, sideways range throughout the rest of the session. The resilient Nasdaq Composite held up the best, dropping 0.9%. The S&P 500 lost 1.2% and the Dow Jones Industrial Average fell 1.1%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 1.3% and 0.9% respectively. All of the main broad-based indexes settled in the bottom third of their intraday ranges.
Turnover rose across the board, causing both the S&P and Nasdaq to register "distribution days" indicative of institutional selling. Nevertheless, volume increased only modestly. Total volume in the NYSE came in 2% above the previous day's level, while volume in the Nasdaq ticked 4% higher. The Nasdaq's volume has risen in each of the past two days, an "accumulation day" followed by a higher volume "distribution day." However, trading in that exchange still remains below its 50-day average level. In both the NYSE and Nasdaq, turnover has trickled in below average levels for the past twelve consecutive days. The passing of the Labor Day holiday has, so far, only led to a minor increase in trading activity.
Comparing the technical patterns of the Nasdaq Composite and Dow Industrials, we see a tale of two different markets shaping up. The most noticeable difference is that the Nasdaq has broken out above its 50-day MA, which also acted as support during yesterday's drop. Conversely, resistance of the 50-day MA perfectly marked the high of the Dow's bounce on Tuesday, which subsequently lent a hand in yesterday's broad-based decline. The Nasdaq is also very close to breaking out above its August high, but the Dow is not. Compare the daily charts of the two indexes below:
Drilling down to the shorter-term hourly charts, one will quickly see another big difference between the two indexes. The Dow closed below support of its hourly uptrend line (from the August 16 low), but the Nasdaq is still well above it. Further, the Dow is back below its August 24 high, but the Nasdaq is still above it. We've removed the moving averages on the hourly charts below so that you can more easily see the trendlines:
As you can see, the bullish divergence in the Nasdaq is apparent on multiple time frames. As such, the Nasdaq will most likely do the heavy lifting if the overall market attempts to climb higher. Even if further downward momentum builds on yesterday's broad-based losses, the Nasdaq should drop at a much slower pace than the Dow and S&P. Although not illustrated above, the chart pattern of the S&P 500 resembles the Dow, as both are stuck below their 50-day MAs. But unlike the Dow, the S&P 500 is still (barely) above lower channel support of its hourly uptrend line off the August 16 low.
Putting it all together, the divergence and tug-of-war within the broad market could result in choppy trading conditions in the coming days. To combat this, consider positioning yourself on both sides of the market by selling short an industry sector or index with relative weakness (such as the Dow), while simultaneously being positioned long in a sector with relative strength (such as the Nasdaq). If the broad market makes a clean and decisive break in either direction, one can simply cut the positions on the opposite side and/or get heavier in the direction of the trend. Alternatively, sitting in cash and watching from the sidelines is never a bad idea when the stock market is at an inflection point.
Following our own advice, we now have a mix of long and short ETF positions. We took profits on our OIH long position yesterday, then subsequently sold short the Dow Industrials when it broke support of its hourly uptrend line. Rather than selling short the DIAMONDS (DIA), we bought the inversely correlated UltraShort Dow 30 ProShares (DXD). Despite the weakness in the broad market, each of our other long positions in Biotech (IBB) and Fixed-Income (TLT and LQD) moved higher yesterday.
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:As we focus on continually improving the format of the ETF Trend Tracker for maximum user friendliness, you will notice we made a minor change this week. Since most subscribers are interested in knowing their "percentage risk" of a new ETF entry at any given point, not only when it triggers, we have eliminated the "% risk" columns that previously tracked risk just from trigger price. Instead, we are keeping only the "midtrend % risk" column. This enables you to know how much risk a new trade entry would entail, regardless of when the trade is entered, based on the "S1" MTG Stop.
The market had another volatile week, but finished little changed. The trading patterns were very similar in each Market Segment, but the Nasdaq 100 (QQQQ) showed noticeable relative strength. QQQQ actually triggered to the "ascending trend" list by the close of Friday's session. So far, however, the Nasdaq did not experience a robust breach of the trigger. Therefore, we will need to keep a close watch on QQQQ in the coming week because it technically has not yet traded above resistance of its trigger price.
There was a general migration of ETFs into the "ascending trend" list, with participation from most industry sectors. On this week's updated ETF Trend Tracker, rows shaded in pink color denote new entries to the "ascending trend" list. A large number of ETFs are also about to reverse, but their initial risks are relatively high due to the market's recent volatility. If, for example, an ETF reverses to the "ascending trend" list, the stop would need to be set at a large percentage difference away from the trigger entry price. However, the MTG Stop (S1) will be set tight enough to moderate the risk. Maintaining a mix of long and short positions is probably your best bet in this choppy environment.
The only industry or specialty sector making a noteworthy move was US Oil (USO). USO rallied well throughout the week and triggered onto the "ascending trend." However, it has been identified as a choppy trend because it previously reversed its trend not too long ago.
New to the "ascending trend" list was the long-term T-Bonds (TLT). The bonds rallied well last week, and even the Corporate Bonds (LQD) took notice of the bullishness. Wagner Daily subscribers know that we bought both TLT and LQD last week.
The International sector acted particularly well at the end of the week, as many ETFs gapped up and closed near the highs on the week, almost in unison. The majority of the ETFs still on the "descending trend" list may stay there until the volatility settles and reversal patterns develop.
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.