After a relatively flat open, the major indices grinded their way into slightly positive territory late in the morning, but the bears once again took control in the afternoon. Sellers stepped in during the final hour of trading, sending stocks to new intraday lows. Opposite of how bullish markets often start the day weak, but finish strong, bearish markets frequently surrender morning gains by the closing bell. Tech stocks continued to get pummeled yesterday, causing the Nasdaq Composite to fall 1.7% and realize its fourth consecutive day of substantial losses. In just the past four sessions, the index has nosedived 8.5%! The S&P 500 lost 1.0%, but the Dow Jones Industrial Average slipped "only" 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices declined 0.7% and 1.5% respectively. Like the prior day, all the main stock market indexes finished at their intraday lows.
In both the NYSE and Nasdaq, total volume came in 6% lower than the previous day's levels. The Veteran's Day holiday may have been a factor in the slightly lower turnover. Nevertheless, trading remained above 50-day average readings. The adv/dec volume ratios were on par with the previous day's internals. Declining volume in the Nasdaq exceeded advancing volume by 3 to 1, while the NYSE margin was negative by only 2 to 1. Yesterday's price action again had the feeling of steady selling, as opposed to panic dumping of shares. This was confirmed by the only moderately negative adv/dec ratios. Unfortunately, this means we have not yet seen the extremely negative levels necessary in order to put in a market bottom.
Closing our only open ETF position and initiating two new ones, yesterday was a rather active day for us. Since we're being conservative with new trade entries, focusing only on specific industry sectors, we took advantage of the breakdown and relative weakness in the Oil-related sectors yesterday. Free-falling 5.9%, the Oil Service Index ($OSX) was one of the biggest losers of the primary industry sectors we follow. The sister Oil Index ($XOI) shed 3.6%. Both indexes suffered significant technical damage, as they sliced through their 50-day moving averages and broke support of their three-month uptrending channels.
In the pre-market yesterday, we noticed that many leading oil stocks were positioned to gap down on the open. Because both oil indexes were barely clinging to support of their 50-day MAs and uptrending channels, we anticipated the opening weakness would lead to further losses throughout the session. As such, we sent an intraday e-mail alert to subscribers of The Wagner Daily, informing them of our plan to buy the inversely correlated UltraShort Oil and Gas ProShares (DUG) on the open. As with all of the ProShares UltraShort ETFs, DUG moves in the opposite direction of its underlying stocks, enabling investors of non-marginable accounts to take a bearish position without selling short. The daily chart of DUG below illustrates yesterday's breakout above convergence of its 50-day MA and primary downtrending channel. Notice how flipping the chart of DUG upside down would basically give you the same chart patterns that the Oil and Oil Service Indexes have formed. Many of the UltraShort ETFs have the exact opposite chart patterns of their underlying indexes:
Since DUG closed at its intraday high, the position is already showing an unrealized gain of 2.3 points from our entry on the open. Our protective stop is currently just below the 50-day MA, but we will be trailing it higher in the coming days. With the clear relative weakness the oil and oil service sectors began exhibiting yesterday, this may be one of the best sectors to be short right now. In the event of a broad-market bounce, indexes with relative weakness typically rally a much lower percentage than the major indices, if at all. But if the broad-based weakness continues, oil and oil service could be expected to lead the way lower, at least in the short-term.
In our hedge fund, we also realized solid profits from short positions in several stocks of the S&P Metals and Mining Index ($SPSIMM), which tumbled 5.7% yesterday. The S&P Metals and Mining SPDR (XME), an ETF that mirrors the price action of $SPSIMM, suffered technical damage similar to the oil and oil service ETFs. Take a look:
Though we did not "officially" enter XME as a short position, any rally towards new resistance of its 50-day MA would present a low-risk entry point for short selling this bearish trend reversal. Support of the 200-day MA ($60.73) is a technical element to be aware of, but in the current environment, many indexes are breaking below their 200-day MAs without putting up much of a fight.
Over the past month, we have discussed the relative strength in the India Index (INP) on several occasions. Yesterday, INP finally provided us with a low-risk entry point by pulling back to support of its three-month uptrend line. Given that the four-day retracement was on relatively light volume, it does not appear that institutions were heavily selling the ETF during its correction. Showing the most relative strength of all the international ETFs, we also like that INP is not directly correlated to the direction of the U.S. markets. Consider, for example, that despite yesterday's 1.0% drop in the S&P 500, the Bombay Stock Exchange actually gained 1.6% in the overnight session that followed. This should have a positive effect on the price of INP today, which we bought on a pullback to its trendline yesterday:
Finally, we covered our short position in the Mexico Index (EWW) near its intraday low, netting a gain of 6.7% (3.9 points) since our short entry four sessions ago. EWW has not yet reached our original downside target and may continue to head south in the intermediate-term. However, it has trended straight down since breaking its 200-day MA on November 7. In the short-term, it is reasonable to expect a retracement at least half way up to its 200-day MA. Rather than holding our short through an eventual bounce, we made the decision to take the profit and watch for a potential short re-entry on any decent counter-trend retracement.
In confirmed broad market downtrends, approximately 75% of stocks move in the same direction as the broad market. Therefore, finding a winning stock ETF on the long side right now is akin to searching for a dropped contact lens on a glass floor (was bored with the "needle in a haystack" analogy). Financials began finding support as money flowed out of the tech sectors last week, but any long entry in financials requires precision trade management. Only advanced traders should consider playing such a counter-trend bounce. Aside from the continuing strength in commodities ETFs, the only other sectors we spotted strength in last week was within Biotech and Medical Devices. Unfortunately, the chart patterns of the corresponding ETFs are not that great, but traders of individual stocks should take a look at the following tickers: UTHR, ONXX, LIFC, IVGN, and CRL. These medical stocks are among the most bullish chart patterns in the market right now, but let us again remind you of the risk of swimming against the tide.
Overall, your odds of profitable trading clearly favor the short side of the market right now, but patience is required there as well. Many ETFs have now broken key support levels, but the astute trader will wait for the next bounce into resistance of a prior low or significant moving average before selling short. After closing our short position in the Russell 2000 for one of our largest gains ever last week, we're enjoying being largely positioned in cash. When the broad market's relief rally eventually comes, we'll be looking for new short entries on ETFs that have shown the most relative weakness. Until then, there's no harm in remaining primarily on the sidelines, avoiding the risk of giving back recent gains. For those who prefer to avoid short selling altogether, cash is definitely king!
In the broad market, the Nasdaq Composite closed just above its 200-day MA. Though the index may attempt to breach the 200-day MA on an intraday basis, this major support level should provide an impetus for some sort of relief rally. We certainly would not be looking to aggressively buy stocks or ETFs on any rally attempt, but advanced traders might consider very short-term momentum trades on the long side. Beaten-down sectors such as Financials and Retail could be bought with a 1 to 3 day time horizon, but tight trailing stops are a necessity! Alternatively, one might be just as wise to sit on the sidelines, waiting for the market to present its next clear short selling opportunities on any rally into key resistance levels. Of course, we'll continue providing them to subscribers of The Wagner Daily as we see them.
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:
There is no new Stalk of the Week this week, as we are looking for a bounce in the market to establish more short positions. On the long side, we may buy one or two strong stocks for a quick pop. However, we would be doing a dis-service to list it here in the free weekly newsletter without being able to offer the immediate follow-up required for long positions right now.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:Last week was busy and bearish for the major indices and their corresponding ETFs. The negative tone took all the remaining broad-based ETFs into the "descending trend" list, including the formerly strong Nasdaq 100 Index. In just the last three days of trading, approximately 7 weeks of gains have been wiped out. The recent volatility expansion creates greater overall investment risk, so consider reducing your share size on all new ETF entries. Of paramount importance, be sure to honor the protective stops in order to control your risk exposure into the year-end. Those who manage qualified accounts, or portfolios that gain only when securities are bought, may consider taking measures to protect any continuation of weakness in the market. Waiting for at least a solid relief rally before buying new positions is very prudent if short selling is not part of your strategy.
One after another, industry sector ETFs dropped into the "descending trend" list as last week's trading session progressed. The Internet sector (HHH) rapidly fell 6% after hitting its bearish reversal trigger. You might look at this as a 6% gain if the short entry was taken when the trend reversed. Not surprisingly, the Financial SPDR (XLF) continues leading the major industries lower. XLF was one of the first ETFs to move into our "descending trend" list, providing an early heads-up on the short side for astute investors and traders.
In order to take advantage of current weakness in the market, MTG has begun covering the volatile UltraShort Financials (SKF). You will find this ETF in mid-trend on the "ascending trend" specialty ETF list. MTG also replaced the Regional Bank Holders (RKH) with a very similar ETF, listed as ticker symbol (IAT). This new ticker will allow traders more flexibility and less capital to participate in trading the Regional Bank sector. Additionally, MTG added the UltraLong S&P 500 (SSO), which complements the UltraShort S&P 500 (SDS). To add more depth in the energy sector, MTG also added the US Natural Gas (UNG) to the Specialty sector list.
The Fixed-Income (bond) ETFs benefited from the weakness in the equities market, as buyers sought refuge and lifted the bond ETFs to new highs in their current ascending trends. The short-term (SHY) and mid-term (IEF) bonds performed best, closing at their highest levels since triggering to the long side.
Two international sector ETFs fell into the descending trend list: China (FXI) and Mexico (EWW). Both FXI and EWW fell from lofty levels within a short period of time. Watch for more international ETFs to follow if weakness continues in the coming week.
MTG took notice of the strength in the Indian market several months ago, and has begun covering the India Index (INP) in this week's ETF Trend Tracker. Though it has performed very well since September, INP has just begun to correct within its ascending trend channel, above the mid-October support.
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.