This issue of The Wagner Weekly is intentionally being sent a few days later than usual, as we wanted to see how last week's whipsaw volatility concluded before writing the weekly commentary. Below is the market analysis that appeared in today's issue of The Wagner Daily, which was sent to subscribers before the market opening. Enjoy!
In last Friday morning's Wagner Daily, we said, "With the S&P 500 in 'no man's land,' the Dow still below major resistance levels, and the Nasdaq trying to break out to a new intermediate-term high, the major indices are obviously out of sync with one another. Whenever this occurs, trading typically becomes whippy and indecisive." The subsequent action that followed that day certainly proved our expectation of indecision!
Last Thursday, stocks gapped higher on the open, then built on their gains throughout the session, but the exact opposite scenario occurred on Friday. Instead, the broad market opened lower, then continued trending down throughout until the closing bell. When the dust settled, the major indices had followed up Thursday's impressive average gains of 2% by plunging approximately 3% on Friday. The S&P 500 and Dow Jones Industrial Average suffered identical losses of 3.1%, as the Nasdaq Composite tumbled 3.0%. Even the small-cap Russell 2000, which had been showing relative strength to the broad market, fell 3.0%. The S&P Midcap 400 lost "only" 2.6%. Inverse of the previous day's closing action, all the main stock market indexes finished at their intraday lows.
Total volume in the NYSE surged 17% above the prior day's level, causing the S&P 500 to register a bearish "distribution day." Trading in the NYSE rose to its highest level since April 1 of this year, but that's obviously negative considering the higher turnover correlated with massive losses. Institutional selling in the Nasdaq, however, was less prevalent. Turnover in the tech-heavy Nasdaq eased 1%. Nevertheless, market internals were atrocious across the board. In the NYSE, declining volume crushed advancing volume by a margin of nearly 12 to 1. The Nasdaq adv/dec volume ratio was negative by approximately 9 to 1.
The S&P 500 finally joined the Dow Jones Industrials by making a "lower low" on its daily chart. This occurred when last Friday's sell-off shoved the S&P below support of its prior lows from May. On the daily chart of the S&P 500 below, we've annotated a few other notable points:
The solid pink horizontal line on the chart above marks last Friday's key break of price support that caused a "lower low" to be formed. The new intermediate-term downtrend began with the high of May 19 (circled in pink). Remember how much we were talking about the 200-day moving average being like a brick wall? If so, it should not be surprising that the test of the 200-day MA on May 19 marked the high of the bounce off the March 2008 lows. With the S&P now firmly below its 20 and 50-day moving averages, as well as its prior lows from last month, we expect to see further weakness in the near-term. If that happens, next major price support for the S&P should be found near the April 2008 low (the dashed blue horizontal line). Further, support of the 61.8% Fibonacci retracement from the March 2008 low to the May 2008 high is also near that same level (1,326). A drop in the S&P 500 down to this area would be an ideal place to cover near-term short positions, and prepare for possible re-entries on the long side of the market.
In a much more precarious position, the Dow Jones Industrial Average slid to new lows within its intermediate-term downtrend. Showing relative weakness within the stock market, recall that the Dow had already broken down below its May lows several days ahead of the S&P 500. Perhaps most concerning about the Dow is that last Friday's pounding caused the index to lose support of its 61.8% Fibonacci retracement from the March 2008 low to May 2008 high. In uptrends, a pullback to the 61.8% retracement level is typically considered the "last line of defense" that prevents a complete reversal back to the lows. Unless the Dow suddenly roars back today, odds are now good the index will soon lead the rest of the main stock market indexes in testing its 52-week low. We've annotated the break of the 61.8% Fibonacci retracement on the Dow's daily chart below. Also, note the double top that caused the Dow to instantly reverse after running into its 200-day MA twice last month:
The Dow's weakness last week pushed our position in UltraShort Dow 30 ProShares (DXD) to an unrealized gain of more than 3 points. We have tightened the stop to protect some of our gain in the event of a reversal, but the price action has shown us no reason to take profits yet. Instead, we plan to lock in profit on half the share size into the Dow's next moderate downward move, while keeping the remaining half of the position with a loose stop, just in case downward momentum in the Dow really starts to pick up.
The Nasdaq Composite, which closed at a new five-month high just two days ago, has already fallen back below both its 20 and 200-day moving averages. It also closed just a tad below its three-month uptrend line, but not by a wide enough margin to declare a clean break of trendline support. Still, despite last Friday's nasty reversal, the Nasdaq continues to show relative strength and a much stronger chart pattern than both the S&P and Dow. Specifically, it's still well above its 50-day MA, as well as its prior lows from last month. If the stock market dazzles us with another whipsaw move back up, the Nasdaq is still the place to be:
The small-cap Russell 2000 and S&P Midcap 400 are discussed much less often than the S&P 500, Nasdaq, and Dow. However, they collectively have a tendency to lead the broad market in both directions by outperforming in uptrends, and underperforming in downtrends. Acting even better than the Nasdaq, both indexes convincingly broke out of consolidation to their highest prices of this year just two trading days ago, but you can probably assume what happened. Both indexes closed the week below their lows of the breakout day, and back within their prior bases of consolidation. As discussed last week, failed breakouts usually reverse lower quite rapidly. If the Russell and S&P Midcap indices start to catch up with the bearish patterns in the S&P 500 and Dow, there will be very few pockets of market segment strength in which to seek refuge.
Last Friday's sell-off means the broad market trends are now "down" for all three timeframes: near-term, intermediate-term, and long-term. A pattern of "lower highs" and "lower highs" is now prevalent in each of those timeframes, though the Nasdaq the near and intermediate-term trends of the Nasdaq might be the exception. In the big picture, don't forget that stocks have been in a primary downtrend since last October. We must therefore assume the recent March through May rally was merely a counter-trend bounce from "oversold" conditions. If you have been a subscriber for the past several months, you already know this is what we have contended all along. Keep those stops in place and remember to trade 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 Stalk of the Week is:
There is no new Stalk of the Week this week, as we don't want to be too aggressive with new positions right here. However, the MTG Stalk Sheet is presently long AEM and short OMG, both of which are looking good.
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 Market Segment ETFs closed the week sharply lower across the board, but the small caps (IWM) and mid caps (MDY) retraced much less than the other broad-based indexes. Of the two, MDY seems to trade in a more orderly fashion than IWM, forming cleaner patterns. We also noticed the S&P 500 Growth (IVW) fell lower, but stayed just above its Reversal Stop (S2) and other near term support levels. Yielding to the pressure was the S&P 500 (SPY) breaking below support levels and entering the descending trend. The Dow 30 (DIA) also broke down sharply below key support.
There were several industry sectors that came under heavy pressure with the broad market last week. Take Regional Banks (IAT), for example. IAT broke down from its inability to post higher highs from the early May attempt, and then began falling back down to our Trigger. IAT broke through support levels and closed at the lows of the week. Aerospace (PPA) was another industry that looked particularly weak. Check out this week's updated ETF Trend Tracker report for ETFs that hit their Reversal Trigger (S2) levels. ETF additions to ascending and descending trends were made, which can be quickly spotted by looking for rows shaded in pink color. Gapping higher were the Commodities (DBC), Oil (USO), and Natural Gas (UNG).
The fixed-income (bond) ETFs were little changed and steady through the volatility in the equities market.
Several International ETFs also turned lower, and a handful of them landed in the "descending trend" list. ETFs already in the descending trend extended their route and continued to break below support levels. Watch for unusually high risk in India and China due to their volatile chart patterns as of late.
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.