A quarter-point rate cut by the Federal Reserve Board yesterday afternoon triggered a massive sell-off that sent stocks tumbling into the close. Although practically all of Wall Street expected at least a quarter-point reduction in the Fed Funds Rate, investors and traders were not impressed enough to abstain from selling into strength of the market's recent gains. Both the S&P 500 and Nasdaq Composite plunged 2.5%, as the blue chip Dow Jones Industrial Average careened 2.1%. Small and mid-cap stocks were even harder. The Russell 2000 lost 3.2% and the S&P Midcap 400 fell 3.0%. After free-falling more than 3% from their intraday highs in just over ninety minutes of trading, all of the major indices finished at their dead lows.
Volume spiked across the board, causing both the S&P and Nasdaq to register a bearish "distribution day" indicative of institutional selling. Total volume in the NYSE surged 27% above the previous day's level. Turnover in the Nasdaq swelled 19%. Despite the increased trading activity, volume in both exchanges exceeded 50-day average levels by only a marginal amount. This is because overall volume levels in the preceding two days trickled in at the lowest levels in months. Market internals were about as ugly as they come. Declining volume in the NYSE trounced advancing volume by more than 14 to 1. The Nasdaq adv/dec volume ratio was a little better at negative 5 to 1.
If you read our commentary in yesterday morning's Wagner Daily, in which we suggested the likelihood of a post-Fed sell-off, the late day collapse should not have caught you totally off guard. Hopefully, you heeded our advice to, "have a firm plan of action for managing your positions ahead of the 2:15 pm ET announcement." If so, damage to your account from any long positions should have been acceptable. Going into yesterday, we had just two open positions because we did not want to be heavily positioned ahead of the highly anticipated announcement on economic policy. Gold and silver were not immune to the late-day selling, which caused our long position in the iShares Silver Trust (SLV) to fall sharply alongside of equities. However, we made a judgment call to lock in a one-point gain by selling SLV after it fell below support of the prior session's intraday consolidation. SLV subsequently lost another point by the closing bell. Below is a 15-minute intraday chart of SLV that illustrates the point at which we sent an e-mail sell alert to subscribers:
Our initial stop in SLV was just below the 50-day moving average, approximately three more points below yesterday's closing price. Because SLV had just broken out above its downtrend line one day earlier, the risk of a failed breakout in yesterday's bearish momentum was too high to consider holding SLV all the way back down to the original stop. If it happens to recover, we can easily re-enter SLV, but taking a profit on long positions in the face of such heavy selling is never a bad idea. It also allows you to re-assess the market with a clear head. Conversely, we kept our long position in the Pharmaceutical HOLDR (PPH) because it held within its recent base of consolidation and is still showing a small unrealized gain.
High volatility on Fed afternoons is not unusual, though it's rare that the market plunged steadily lower without whipping back towards the intraday highs at least once or twice. The selling was incessant, causing a lot of technical damage to occur on the charts of the main stock market indexes in a period of just over ninety minutes. For starters, the S&P 500 sliced through support of its 50-day moving average that it had broken out above just three days prior. Worse is that the index closed below its 200-day MA as well:
Along with the breaks of moving average support, the S&P 500 also moved below support of its two-week uptrend line off the November low (the ascending red line). Nevertheless, one day of heavy selling is too early to declare the recovery off the lows as being dead. The "swing low" of 1,460, formed on December 4, remains intact. As such, the recent pattern of "higher highs" and "higher lows" on the daily chart has not yet changed. A firm close below the December 4 "swing low" would swiftly cause us to resume our overall bearish bias that we had throughout most of November. Since it typically takes one to three days to see the real reaction to Fed announcements, the market's price action over the next few days will likely determine the subsequent trend in coming weeks.
Unless the major indices brush off yesterday's losses and rapidly move back towards their recent highs, short setups will soon develop. We'll be ready for new short entries when the setups begin presenting themselves, but we're laying low until the market confirms that yesterday's action was not just a knee-jerk reaction. Similarly, yesterday's price action and technical damage gives us no good reason to look for new long entries right now.
As of two hours before the opening bell, the S&P and Nasdaq futures are both poised to open about 0.7% higher today. If you happen to be stuck in losing long positions that you should have closed yesterday, view this upside gap as a gift and consider selling your positions at a reduced loss. At the very least, trail a tight intraday stop. Never fall into "hope" mode with stocks and ETFs that have exceeded your predetermined stop prices. Professionals quickly and calmly take their losses when presented with opportune chances to do so. Many years ago, I learned the hard way that hoping and waiting for a losing trade to recover to your entry point is a surefire way for a tolerable loss to turn into a more damaging one, especially in weak markets. In all circumstances, you should live by the rule of trading what you see, not what you think!
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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:
There is no new setup for today, as we want to first observe the follow-up to yesterday's Fed meeting. Assuming it was not just a knee-jerk reaction, we will begin looking for short setups on bounces into resistance.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:The stock market continued to rally last week; however, there are now more overhed resistance levels to contend with. Several MTG Stops (S1) were hit, so we will be stalking the developing patterns to update the Reversal Stops (S2). The midcaps (MDY) broke out above two previous "swing high" resistance levels and above the upper channel of its prior downtrend. Click on the MDY ticker symbol for an annotated chart in this week's ETF Trend Tracker.
Many Industry Sector ETFs rallied to form "swing low" patterns. These swing lows are higher than previous lows, thus setting up for counter-trend rallies. In some cases, expect trend reversal trigger levels to be tested. For an example, click on ticker symbol "IAT" to view our annotated chart of Regional Banks. IAT formed a swing low and is poised to break above the preceding swing high. MTG has identified this as a Reversal Stop and will be our entry trigger to the long side if the market trades above that level. There are several setups with this pattern, and we have listed most of them below in the "Alert of Imminent reversal to the upside." Some Industries hit new highs, such as Pharmaceuticals (PPH) and Utilities (UTH), but both are considered "defensive" sectors. Biotechs (BBH) came crashing down and hit its reversal stop. Oil (USO) and precious metals consolidated recent gains, while the US dollar finally bounced off its lows.
The bond market rolled over, erasing several weeks of gains in the fixed-income ETFs. The short-term bonds (SHY) held up the best, but the rotation out of the bond market may not be over yet.
Several International sectors reversed and are now back in the "ascending trend" list. Mexico (EWW) is moving well and was one of the first International ETFs to lead the recent rally. United Kingdom (EWU) also joined the other European ETFs in the ascending trend category. India (INP) continues to make large percentage moves higher, as it posted new highs for another week.
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.