The main stock market indexes kicked off the holiday-shortened week on a negative note, as stocks fell sharply across the board. After gapping lower on the open, the broad market sank steadily through mid-day. With two hours remaining, buyers attempted to reverse the downward slide, but the bears resumed control in the final hour of trading. The S&P 500 fell 1.8%, while both the Nasdaq Composite and Dow Jones Industrial Average tumbled 1.7%. Small caps felt the most pain, as the Russell 2000 Index plunged 2.5%. The S&P Midcap 400 lost 1.9%. Each of the major indices closed near their intraday lows, but held above their worst levels from earlier in the afternoon.
Total volume in the NYSE was on part with the previous day's level. Nasdaq turnover declined 14%. Again, one could expect trading activity to continue tapering off ahead of Thursday's Thanksgiving Day holiday. Although volume was lighter, market internals were rather ugly. Declining volume in the NYSE blew away advancing volume by a margin of 9 to 1. The Nasdaq ratio was negative by just over 5 to 1. The unpropitious internals confirmed the broad-based nature of yesterday's selling. Of the major industry sectors we follow daily, only the DJ Utilities Average ($DJU) closed positive, barely triggering our long entry in the iShares DJ Utilities Sector (IDU) setup that we discussed yesterday. We also closed our DUG long and XME short positions, locking in decent gains in both.
Yesterday's sell-off caused the Nasdaq Composite to close at support of its 200-day moving average for the second time in a week. When it last did so, on November 12, the index rallied 3.4% the following day. Given the overhead supply from the Nasdaq's inability to sustain its November 13 gain, it's unlikely we see a bullish reaction of the same magnitude in today's session. Nevertheless, the 200-day MA could easily trigger another bounce of a lesser degree. The mild buying interest we saw yesterday afternoon occurred after the Nasdaq touched its 200-day MA just after mid-day. On the daily chart below, notice how yesterday's low in the Nasdaq Composite perfectly correlated to support of the 200-day MA (at the 2,583 level):
Countering the Nasdaq's support of the 200-day MA is the fact that the S&P 500 closed below support of its near-term low from November 12. A mere intraday "stop hunt" below the prior low would have been expected, but it's bearish that the index actually closed below the prior short-term low. Clearly, one could expect the current technical state of the S&P 500 to weigh on any rally attempt in the Nasdaq. The Dow Industrials also closed below its near-term low, but only marginally. The break of the prior low is illustrated on the daily chart of the S&P 500 below:
In the "big picture," it's now looking quite likely that both the S&P and Dow will test key support of their major lows from August. Both indexes have retraced more than two-thirds of the gains from their August lows to the October highs, lending very high odds they will fall all the way back down. Retracing just over half of its August to October gain, the Nasdaq Composite has a small chance of being the one saving grace. However, the small-cap Russell 2000 already set a new 52-week closing low yesterday, and is barely holding above its intraday lows from August. The Russell 2000 has also followed through to its projected downside target from the bearish "head and shoulders" chart pattern we pointed out in late October. The daily chart below shows the break-down to a new 52-week closing low, as well as the deep Fibonacci retracement the index has made:
Although the S&P and Dow are likely to test their August lows in the not-so-distant future, it does not mean they won't suddenly surge higher before doing so. Remember that both indexes ripped approximately 3% off their lows on November 13, but the gains had completely evaporated just four days later. A similar bounce scenario could play out within the next couple days, as the markets often see a bit of strength in holiday-shortened weeks. But if the anticipated bounce does not come, panic selling could easily send the major indices to test their August lows rather quickly. As always, be sure to maintain discipline to follow your protective stops, and only trade what you see, not what you think!
NOTE: The U.S. markets will be closed on Thursday, November 22 for the Thanksgiving Day holiday, and will close at 1:00 pm ET on Friday. As such, The Wagner Daily will not be published on Thursday, but regular publication will resume with a brief edition on Friday. Enjoy the holiday with your family and friends!
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:Last Tuesday's rally gave the market quite a kick-start near the beginning of the past week, but stocks gave most of it back by the end of the week. The major indices remain near the lows of their descending trends, and are again testing support levels established by the August lows. The Nasdaq 100 (QQQQ), which showed the most relative strength just a couple weeks ago, fell the hardest during the recent weakness. QQQQ did not recover well when the broad market bounced, and is over 10% off its highs. The Market Segment ETFs traded similarly and are setting up to form lower "swing highs." A break of their recent lows will cause a "lower low" to be formed, confirming the intermediate-term downtrends.
Most Industry Sector ETFs did not handle the weakness well either. Dropping into the "descending trend" list were Basic Materials (XLB) and Aerospace (PPA). The industry sector list is heavily weighted on the descending trend, so look for leadership to the downside near the lower portion of the list (for short sales). These include ETFs such as Financials (XLF), Consumer discretionary (XLY), and Semiconductors (SMH). There are a few industries that actually held their recent gains from the rally, such as Pharmaceuticals (PPH) and Retail (RTH). However, it looks like lower "swing highs" area about to form in the direction of their descending trends. Several MTG Stops (S1) were hit, and updated stops are listed in the latest ETF Trend Tracker report.
Money rotated into the bond market ETFs, as new highs were posted. The Corporate bonds (LQD) however, continues to lag and did not participate in the rally. The short-term bond ETF (SHY) is reacting best to the bullishness.
In the International markets, several ETFs dropped into the "descending trend." The weakness in our domestic market was felt worldwide, which is troublesome for bullish positions. The relatively sudden and sharp moves lower have forced placements of stops a little wider than normal in many international ETFs. Managing your risk tolerance well is key to preserving your capital. On the downside, we still like the pattern in Mexico (EWW) for short sale, while India (INP) shows relative strength on the long side.
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.