Stocks valiantly attempted to recover some of their recent losses yesterday morning, but in true bear market fashion, sellers firmly took control into the close. Just as stocks often begin the day weak and finish strong in bull markets, the opposite intraday price action is common in bear markets. The Nasdaq Composite tumbled 2.4%, suffering its eighth consecutive day of losses. The S&P 500 turned an early 1% gain into a 1.8% closing loss. The Dow Jones Industrial Average similarly fell 1.9%. The small-cap Russell 2000 declined 2.6% to another fresh 52-week low, while the S&P Midcap 400 shed 2.3%. As with most days so far this year, all the major indices settled at their dead lows.
Volume continued to expand across the board, as mutual funds, hedge funds, pensions, and other institutions remained interested only in heading for the exit doors. Total volume in the NYSE increased 10% over the previous day's level. The Nasdaq saw just 3% more shares change hands. In both exchanges, declining volume exceeded advancing volume by a margin of 4 to 1. Market internals were indicative of steady selling, but not by an extreme margin that would hint at overdone "panic selling."
Yesterday, we pointed out the bullish setup in the iPath India Index (INP). Specifically, we noted that it was poised to resume its primary long-term uptrend after a one-month correction off the high. As anticipated, INP gapped above its intermediate-term downtrend line in the morning, triggering our long entry. Not surprisingly, however, it reversed sharply lower with the rest of the stock market in the afternoon. We took a shot at buying INP after it traded through our trigger price in the morning, but we trailed our stop to break-even shortly thereafter. Fortunately, this allowed us to scratch the trade when INP reversed a few hours later. Though the setup in INP would have probably followed through nicely in a strong market, the late-day failure was a good example of how difficult it is to profit on the long side of the market right now. Rallies in even the strongest of ETFs and stocks are extremely short-lived. Since we trailed the INP stop to breakeven right after entry, there was no harm done. However, this shows how one must be extremely proactive with micromanaging any long entries in this newly formed bear market.
In the January 7, 2008 issue of The Wagner Daily, we illustrated that the previous day's weakness pushed the Nasdaq below key support of its November 2007 low, but the S&P and Dow were still holding. Unfortunately for the bulls, this did not remain the situation for very long. After just a feeble one-day bounce, both the S&P and Dow sliced through their November lows as well. A retest of the August 2007 lows in each of the major indices is now virtually assured. The Dow finished at a 9-month closing low yesterday, and is only 0.6% above its intraday low from August. This is illustrated below:
Remember that the November low in the Dow also represented the "neckline" of its weekly "head and shoulders" chart pattern. After the "right shoulder" formed in December, the breakdown below the November low in January also correlated to follow-through in the "head and shoulders" pattern. Both the S&P 500 and Nasdaq formed weekly "head and shoulders" patterns as well, then broke their necklines when they fell below their November lows within the past week. On a technical level, this is one of the reasons why downside momentum has been so fierce recently. We normally would have initiated short sales during the formation of the "right shoulders," but that correlated with the light-volume holiday period, a tricky time to be trading in general.
Trying to blindly pick a bottom at current levels, without any technical sign of the market having found support, makes absolutely no sense. One could reasonably argue the stock market is "oversold" right now, but remember that "oversold" markets can, and often do, become even more "oversold" before seeing relief. Since the Nasdaq has already posted eight straight days of losses, who's to say the losing streak can't extend a few more days? Conversely, attempting to profit from new short sale entries after stocks have already taken such a beating could quickly find one scrambling to cover positions when the inevitable "short squeeze" comes along.
Obviously, the broad market will eventually find support and put in a tradeable bounce on the long side for short-term traders. Such a countertrend retracement will simultaneously provide ideal short sale entry points on ETFs and stocks that are now in firmly established downtrends. But until that happens, there just isn't much to do. As long-term subscribers to this newsletter already know, our track record of consistent trade profitability over the years is the result of being aggressive when market conditions are ideal, and laying low when risk is too high. If you're a novice trader or new subscriber to this newsletter, please realize that capital preservation, not high profits, should be your primary goal right now. A patient trader is a profitable one.
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.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 took a beating in the first week of the new year. The Market Segment ETFs are either very close to their prior lows from November, or have already traded below those levels. The small caps (IWM) and mid caps (MDY) have hit new lows and are leading the way lower, but large cap ETFs such as the S&P 500 (SPY) and Dow 30 (DIA) are just testing the lows. In our annotated chart of MDY, notice four very distinct "lower highs," confirming a solid downtrend. Look for these features and other chart patterns identified in this week's annotated charts on this week's ETF Trend Tracker.
Last Friday's trading session really exposed the weak ETFs. Broadband (BDH), for example, began to test support, then immediately broke down below support with acceleration. Lower trading without the acceleration can be seen in the Biotechs (BBH). Note the descending move has the same slope as the trend channel. Acceleration can be seen by the increase in price diverging from the trend channel. Several ETFs landed in the "descending trend" list once again. Be mindful of the ETFs identified as choppy. The Retail sector (RTH) really crumbled from support after gapping down for two days. Other particularly weak ETFs were Financials (XLF), Real Estate (IYR), and Semiconductors (SMH). Institutional investors took refuge in Commodities (DBC), Euros (FXE), and precious metals (GLD, SLV). Oil (USO) and Natural Gas (UNG) were also on the rise.
Money also rotated into bonds. The fixed-income (bond) ETFs made healthy gains for the week, but are nearing some resistance levels. We have been long the bond ETFs since July/August. Corporate Bonds (LQD) remains choppy.
The International ETFs also traded generally lower and will be testing support levels in the coming week. International ETFs are equally balanced between the ascending and descending trend lists, but if the bears take hold, all ETFs in the ascending list will reverse their trends within a 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.
The Morpheus Trading Group web site has just been updated to show several live seminars in which Deron Wagner will be participating in the beginning of 2008. The highlight of these events is the Live ETF Trading Seminar in Fort Lauderdale, Florida on February 9. Hurry, there is little time left to register! For those of you who prefer the north, Wagner will be presenting at the New York International Traders Expo. less than two weeks later. For details of these and other upcoming events, please visit the Upcoming Trading Seminars web page.