Excitement from the Black Friday rally was quite short-lived, as traders returned from the holiday weekend and promptly sold into strength of the prior day's gains. After moving higher for only the first thirty minutes, stocks swiftly reversed course. The bulls attempted to regain control at mid-day, but the reversal attempt fizzled out, sending the major indices to new intraday lows. By the closing bell, all of last Friday's gains had evaporated. The S&P 500 tumbled 2.3%, the Nasdaq Composite 2.1%, and the Dow Jones Industrial Average 1.8%. The small-cap Russell 2000 and S&P Midcap 400 indices fell 2.6% and 1.6% respectively. All the main stock market indexes finished at their worst levels of the day and at fresh near-term lows. Intense selling in the final hour of trading indicated clear reluctance of institutions to hold long positions.
Naturally, turnover was much higher than in last Friday's shortened session. Total volume in the NYSE rose 101%, while volume in the Nasdaq registered 157% greater than the previous day's level. Comparing trading activity to recent full trading days, volume was its lightest level of the past week. Volume in the Nasdaq marginally exceeded its 50-day average, but NYSE turnover was lighter than average. Declining volume in the NYSE surpassed advancing volume by a margin of nearly 7 to 1. The Nasdaq ratio was negative by just under 5 to 1.
Not surprisingly, the biggest gaining ETFs yesterday were the new breed of exchange traded funds that are inversely correlated to the direction of various market indexes and industry sectors. This includes both the ProShares Short/UltraShort and the new Rydex Inverse family of ETFs. As the main indexes are breaking down, these ETFs are breaking out to new multi-month highs. With the indexes that have fallen very rapidly, the inverse ETFs have zoomed straight up with minimal price consolidation, making them risky to buy at current levels. One exception, however, is the ProShares UltraShort QQQ ETF (QID). As the Nasdaq 100 Index has been consolidating near its recent lows for the past several weeks, it has resulted in the formation of bullish price consolidation in the inversely correlated QID. Any further loss in the Nasdaq 100 will cause QID to breakout, triggering a decent buying opportunity in QID. This is annotated in the daily chart below:
As you can see, a move above yesterday's high will represent a breakout above its two-week high. The November 12 high of $43.04 is technically the actual near-term high, but downward momentum in the Nasdaq should lead to a violation of its November 12 low if yesterday's low is broken. In a case like this, one could "scale in" to the trade by buying partial share size on a breakout above yesterday's high, then adding to the position on a rally above the November 12 high. A logical initial price target is resistance of the 200-day MA, around $45.65. To protect against a sudden bullish reversal in the Nasdaq, be sure to keep a protective sell stop not much below yesterday's close. Management of the trade entry in this manner would provide a very positive risk/reward ratio. Note that buying QID before confirmation of an actual breakout above yesterday's high is not advisable. Regular subscribers to The Wagner Daily should note our detailed entry, stop, and target prices below.
In yesterday's commentary, we mentioned that one might expect the major indices to build on last Friday's gains and attempt to rally towards resistance of their 20-day moving averages. Upside momentum indeed carried into the open, but it only lasted thirty minutes before the bears ruined the party. As with the large gains the major indices scored on November 13, the November 23 gains were correspondingly substantial. Unfortunately, however, the same pattern of selling into strength followed. It took four days for stocks to erase their November 13 gains, but the same thing was accomplished in just one session with the November 23 gains. Gapping up above the prior day's highs, then closing below that day's lows, each of the major indices formed bearish "engulfing" candlesticks on their daily charts. The market is making it plain to see that recovery attempts have little chance of holding for more than a day or two before the primary downtrends resume control.
When the main stock market indexes recently retraced more than two-thirds of the gains from their August lows to October highs, we said that they were likely to continue all the way down to at least test support of their August lows. The relatively weak Russell 2000 was the first to do so, trading down exactly to its August intraday low last week. Now, the other major indices are in the process of doing the same. Yesterday, the Dow Industrials finished 102 points below its August closing low of 12,845, while the S&P 500 closed just half a point above its August closing low of 1,406.70. The S&P Midcap 400 similarly settled less than 2 points above its August closing low of 819.97. The Nasdaq Composite fell back below its 200-day MA, but is still 3.6% above its August closing low of 2,451. To keep on top of these pivotal support levels, we suggest setting price alerts on your trading platform to instantly notify you of any violation of the August closing lows. Note, however, that the intraday lows from August 16, a bit further below, will also act as support.
If the persistent weakness in the market is giving you the blues, don't fret. A sustainable bounce will eventually come. But in the meantime, don't try to be a hero by blindly guessing a bottom without having any obvious signs of such. Such heroic and valiant attempts at "bottom fishing" are extremely risky and rarely rewarded in this business. Your main objective right now should be capital preservation. Sitting on the sidelines with a primarily cash position, protecting your hard-earned profits from the less challenging times, will enable you to quickly leap at the ideal buying opportunities when they arise again. As always, it's of paramount importance to trade what you see, not what you think!
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.
There is no new Stalk of the Week, as we are laying low right now. The best short setups are extended, and there isn't much of a reward for being long. We currently have two open longs in the MTG Stalk Sheet, both with reduced position size, due to the weak market conditions. If anything catches our eye intraday, we will promptly send an e-mail alert to subscribers.
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:Several Market Segment ETFs broke into new low territory for their respective descending trends, but the major indices closed the week with decent gains in Friday's abbreviated trading session. Not surprisingly, the rally occurred as most of the main stock market indexes neared their August lows. Small caps (IWM) and the Dow Dividends (DVY) are the only two ETFs that have already traded below their August lows.
A number of Industry sectors extended their descending trends. Most ETFs accelerated their move lower, as sellers did not want to hold long positions over the holiday weekend. Four different Industry Sector ETFs are now showing a gain on the short side of more than 10% since reversing to the "descending trend" list. Note that Financials (XLF) is showing a gain of nearly 20% since triggering to the MTG descending trend on June 25 of this year.
Consumer Staples (XLP) is one of the last remaining stock ETFs in the "ascending trend" list that remains relatively strong. A new closing high above $28.60 would be bullish. In the "specialty" ETF market, the Euro Currency (FXE) is once again back to new highs. Gold (GLD) formed a near term "swing low," and rallied back above the trend channel support. US Oil (USO) rallied above its "swing high" resistance and posted a new high mid-week. The MTG Stop (S1) has been squeezed tight in order to both lock in gains of over 31%, as well as not risk giving back too much of the recent rally.
The bond market ETFs gained momentum to the upside, as institutions searched for a safe haven to park cash to preserve their equity through year-end. Corporate bonds (LQD) remained lifeless and is stagnant around the trigger level.
The list of International ETFs in the "descending trend" list continues to grow, as two more ETFs reversed their primary trends last week. All the MTG Stops have been updated to lock in or reduce risk from the widespread weakness. Remember that updated stops can be quickly spotted by looking for cells shaded in pink color. Bucking the general trend and still showing the most relative strength, India (INP) posted a bullish closing high above resistance of its recent high. INP also bounced from mid-October high support. If the bullish trend continues, new highs will be challenged and another long entry opportunity will arise if trading breaks into the $93 range. Remember to use the "Mid-Trend (S1) % Risk" column to determine your overall risk of buying an ETF mid-trend.
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.