A modest rally attempt promptly fizzled out last Friday morning, sending stocks lower for another session. However, the major indices stabilized at mid-day, helping minimize the losses. The S&P 500 lost 0.6%, the Dow Jones Industrial Average 0.5%, and the Nasdaq Composite 0.3%. The small-cap Russell 2000 fell 1.1%, continuing its slide to another 52-week low. The S&P Midcap 400 closed 0.4% lower. All the main stock market indexes closed in the bottom third of their intraday ranges.
Total volume in the NYSE rose 15%, while volume in the Nasdaq increased 4% above the previous day's level. Last Friday was monthly options expiration day, so it was not surprising to see higher turnover. Still, it was the busiest day of trading in the NYSE since August of last year. Similarly, Nasdaq trading was the highest in several months. Market internals were negative, but not by a wide margin. In both exchanges, declining volume exceeded advancing volume by less than 2 to 1.
As you've probably already heard, markets around the world got slammed while the U.S. markets were closed for Martin Luther King Day. The global selling pressure has, of course, spilled over to the U.S. futures markets as well. As I write this late Monday night, the S&P, Nasdaq, and Dow futures are each positioned to open approximately five percent lower than last Friday's closing prices. Presently, the S&P 500 futures are trading around the 1,267 level. Does that number sound familiar? It should, as we said in last Friday's Wagner Daily that "the S&P 500 crashed through support of its five-year uptrend line. With the long-term uptrend line now broken, the next major area of support should be found around the 1,267 level. This is the 38.2% Fibonacci retracement from the October 2002 low to the October 2007 high." We have applied the Fibonacci retracement lines on the monthly chart of the S&P 500 below:
After the S&P 500 broke support of its five-year uptrend line last week, we expected the downward momentum to continue at least to support of its 38.2% Fibonacci retracement. Nevertheless, we did not necessarily expect that drop to come just two days later! It's certainly too early to tell whether or not the 1,267 area will provide support for long. However, if the market is going to put in a significant bounce sometime this month, this would be the most likely level for it to happen. Looking at long-term charts such as this are a good way to keep things in perspective. Though the S&P 500 is already down nearly ten percent this month and poised to slide five percent more on the open, the reality is that we are merely seeing an overdue correction from the impressive five-year bull run. Only if the 61.8% Fibonacci retracement is violated would stocks be likely to test their 2002 lows.
Like the S&P, the Dow is also positioned to open in the vicinity of its 38.2% Fibonacci retracement of its five-year uptrend. This is shown on the monthly chart of the Dow Jones Industrial Average below:
With the futures down so much in the pre-market, stocks are likely to follow one of two scenarios today. The first is that institutions immediately take advantage of the gap down to 38.2% Fibonacci support and begin heavily buying. If this occurs, new long entries could be made relatively safely by first waiting for the S&P and Nasdaq to rally to new intraday highs after the first twenty minutes of trading. This would likely lead to strength throughout the entire session. The other scenario is that institutions sell heavily into the opening gap down, taking stocks much lower. A breakdown to new intraday lows after the first twenty minutes of trading could lead to panic selling in the market.
As we've been saying for weeks, your main focus in this market must be capital preservation, not huge profits. Successful investors and traders are not those who pick a high percentage of winning stocks in good times, but rather those who lose the least during challenging periods. Capital preservation in bear markets is necessary in order to make it to the next cycle of good times. Fortunately, our Wagner Daily ETF portfolio is all cash right now, having already realized solid profits earlier in the month. This keeps us out of trouble going into today and enables us to quickly capitalize on any golden opportunities that might materialize when the capitulation eventually comes. If you're short the market, consider trailing tight intraday stops to lock in profits into the opening gap down. Don't be greedy. Conversely, if you're still long anything going into today's session, please take a minute to review the MTG Opening Gap Rules, as they may save you a lot of money by preventing you from panic selling on the open.
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 S&P 500 SPDR (SPY) broke support of its primary five-year uptrend line last week, triggering substantial losses in the broad market. There is some hope for indices that have not yet breached support of their March 2007 lows. These include the Dow 30 (DIA) and the Nasdaq 100 (QQQQ). So far, no short-term bottoming patterns have developed in the main stock market indexes. However, many of the major indices are now glued to the lower boundary support of their downtrending channels. This increases the chance for a technical bounce in the coming week, though we certainly would not look to aggressively buy it.
Last week's overly bearish session shoved the last of the Industry sector ETFs onto the "descending trend" list. Even so-called "defensive" sectors, such as Pharmaceuticals, got hammered. If you've taken short positions on any ETFs on the "descending trend" list, you should now be showing a gain. With the exceptions of US Natural Gas (UNG) and Euro Currency (FXE), every ETF on the list is now showing a gain since triggering to the descending trend. Nevertheless, we are beginning to play it cautious by tightening stops on the short side. The technique is complicated, but the end product is the updated stops posted in the latest ETF Trend Tracker report. Please review this issue carefully for important stop level changes, remembering to click on tickers of interest to view annotated charts. We are now poised to stalk ETFs in the descending trend to reverse, and will enjoy the rewards when trends begin to change direction. The Reversal Stop (S2) is our trigger to buy (for descending ETFs), and is always posted prior to it happening. That is the key! You can set your trades up before prices race by and leave you behind wondering, "I could of, should of, or would of."
Check out our charts and see if you are able to withstand the volatility between the trigger dates through today's date. The gyrations in price movement are what you will need to withstand and endure to reach the posted returns. Additionally, if the MTG Stop (S1) is hit, position size most likely will be reduced to lower risk exposure or to lock in partial gains.
Bond ETFs rallied and the Corporate Bonds (LQD) is the most recent addition to the "ascending trend" list.
The International sector did not dodge the pelting dealt to our domestic markets. India (INP) is the lone ETF remaining in the "ascending trend" list. Several international ETFs are showing double-digit gains on the short side within just a month or two of triggering to the descending 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.
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.