As the volume patterns of the past two days accurately predicted, the major indices broke below support of their prior September 5 lows yesterday. The S&P and Dow each closed approximately 1% lower, but the Nasdaq Composite lost 2.6% yesterday. It was a steadily downtrending day from the opening bell, meaning that it was marked by lower lows and lower highs throughout the entire day. If you have were paying attention to our detailed volume analysis the past several days, you should have been prepared and hopefully took advantage of the downtrend by initiating short positions and closing any long positions after support was broken. The beauty of being a short-term trader versus a long-term investor is that we can equally profit from declining stock prices, as well as appreciating prices. Uptrends or downtrends can be equally profitable, just as long as there is a trend. Yesterday actually presented several low-risk trading opportunities if you sold short. Ironically, the media attributed much of yesterday’s selloff to the latest Bin Laden videotape that was released yesterday afternoon. We, of course, know that the technicals were the reason for the selling and the videotape merely provided the perfect excuse. Last Friday’s bearish distribution day in the Nasdaq, Monday’s low volume breakout, and the subsequent distribution day on Tuesday gave us three solid reasons to expect yesterday’s selloff.
The Nasdaq volume was 10% lower than the previous day, but the NYSE volume once again increased 10% over the prior day and was the highest of the past five days. Since the S&P 500 and Dow Jones both closed significantly lower yesterday and volume was higher, this means that yesterday was the second consecutive “distribution day” in the NYSE. The Nasdaq did not technically have a distribution day because volume dropped by 10%, but keep in mind that the Nasdaq has also had two distribution days within the past week (September 5 and 9). Confirming yesterday’s weakness, declining volume outpaced advancing volume by a ratio of 6.5 to 1 in the Nasdaq and 4.5 to 1 in the NYSE.
As I mentioned earlier, each of the major indices broke below support of their prior lows that were set on September 5; the exact price levels were listed in yesterday’s Wagner Daily. This is significant and could possibly represent a short-term top in the broad market. So, let’s take a look at daily charts of each of the three major ETF indices in order to assess the key support and resistance levels to watch over the next several days. We will begin by looking at a daily chart of SPY (S&P 500 Index):
The most important thing to notice with SPY is that it closed at a major support level, as illustrated by the horizontal line above. Since the 102 level previously acted as major resistance on three separate occasions over the past several months, this prior resistance should now act as the new support level. The bounce into yesterday afternoon’s close confirms that buyers were standing by at this important pivot point. Obviously, the market could see a major selloff if this level does not hold because it would indicate a failed breakout to a new high, even after a multi-month consolidation. This would effectively trap the bulls who bought the breakout and would subsequently attract short-sellers who spot the opportunity. Therefore, yesterday’s low is a key level in the S&P and SPY. If that low is broken, shorts would seem to be relatively low-risk and being long would then become risky. However, don’t forget about the 20 and 50-day moving averages, both of which are still below yesterday’s closing price. Unless these moving averages are violated, any selling could remain quite choppy and volatile. On another note, notice yesterday’s volume increase in SPY, which confirmed the break of support. Next we will look at a daily chart of DIA (Dow Jones Industrial Average):
95 is an important level we have been discussing in DIA because it loosely represents the prior low of September 5, as well as the prior high from August 22. As you can see, DIA closed below this level yesterday. However, notice how it bounced off support of its 20-day moving average. More importantly, notice how yesterday’s low was exactly equal to support of the lower channel of the uptrend that began on August 6 (the blue line). The prior support of 95 should now act as overhead resistance for DIA, while the support should be yesterday’s low. If, however, yesterday’s low is broken, this means that DIA will have dropped below both its 20-day moving average as well as its four-week uptrend. Based on the recent relative weakness of the Dow, as well as the bearish volume patterns, we expect DIA to break below yesterday’s low. As such, we took a short position in DIA yesterday. Finally, here is a daily chart of QQQ (Nasdaq 100 Index Tracking Stock):
QQQ is the only one of the three major indices that has broken its primary uptrend line. Notice how QQQ broke below support of an uptrend that has been in place for exactly one month, beginning with the low of August 11. However, we also know that it is not uncommon for an index to briefly probe below support of a trend line for a day or two and then quickly rip back above it. Nevertheless, keep a close eye on QQQ because a sustained break below yesterday’s low would be bearish. As you can see from the horizontal line, QQQ closed just a few cents below the prior high of August 22, which should have acted as support. The next key support for QQQ will be the 20-day moving average, which coincides with the highs from July around 32.50.
The Semiconductor (SOX) Index, which typically leads the broad market, got whacked hard yesterday and gave back an entire week’s worth of gains in just one day. This is just one more warning sign that confirms the bearish volume patterns we have been seeing. There are a few pockets of relative strength out there, particularly in the Pharmaceutical (PPH) and Utility (UTH) sectors. The Bond ETFs (TLT, IEF, and SHY) also showed strength yesterday and may be reversing their downtrends. But at this point, it appears there may be many more opportunities and better risk/reward ratios on the short side.
Because the weekly charts of the major indices are still intact, I am NOT advocating an aggressive bearish stance at this point. However, it is my opinion that testing the waters on the short side offers a good risk/reward at current levels. If the major indices begin to break below their 20-day moving averages, you will be short from much higher prices. But, if buyers suddenly step in and reverse the broad market back to the highs, your losses will be minimal if you keep your stops tight. If you are still long, you may consider closing any positions by selling into strength or, at the very least, keep tight stops in place below yesterday’s lows.
Today’s watch list:
HHH – Internet HOLDR
Trigger = below 41.80 (below yesterday’s low)
Target = 40.20 (above daily trend line support)
Stop = 42.60 (above upper channel of downtrend from Sept. 5 high)
Notes = Internet sector appears ready to roll over and we are ready to short HHH on a break of yesterday’s low, which would confirm a break of the support at 42. Remember to follow $HHI.X, which is the index that tracks HHH. By following $HHI.X, you can get an accurate idea of the fair value of HHH, since the ETF itself often has a wide spread.
Daily Reality Report:
Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from
The Wagner Daily (ETF Intraday Real-Time Room trades are reported
separately in The Wagner Weekly). Net P/L figures are based on the
quantity of shares represented in the MTG Position Sizing
RTH short (1/2 position from Sept. 4) –
shorted 90.76, covered 87.18, points = + 3.58, net P/L = + $178
DIA short (from Sept. 10) –
shorted 94.80, new stop 95.50, target 92.80, unrealized points = + 0.14, unrealized P/L = + $28
RTH hit our trailing stop yesterday morning, netting a gain of 3.58 points on the second half of the position. The DIA short triggered yesterday afternoon and we have lowered the stop to 95.50. FYI, we also shorted IWM in the ETF Real-Time Room yesterday and took the position overnight as well.
Click here for
a detailed explanation of how daily trade performance is calculated.
Click here for a detailed
cumulative report of MTG’s trading performance (updated weekly)
Glossary and Notes:
Remember that opening gaps that cause stocks
to trigger immediately on the open carry a higher degree of risk because the
gaps (both up and down) often do not hold. Use caution if trading stocks with
large opening gaps.
Trigger = Exact price that stock must trade
through before I will enter the trade. If a long position, I will only enter the
stock if it trades at the trigger price or higher. For a short position, I will
only enter the stock if it trades at the trigger price or lower. It is really
important to only enter the position if the trigger price is hit, otherwise the
trade becomes riskier.
Target = The anticipated price I am
expecting the stock to go to. However, this does not mean that I will
always hold the stock to that price. If conditions warrant, I will sometimes
take profits before that price, in which case I will notify you of the
Stop = The price at which I will have a physical stop
market order set. As a position becomes profitable, this stop price will often
be adjusted to lock in profits. Again, you will always be notified of such
changes in the next daily report or intraday if you subscribe to intraday
SOH = Sit On Hands (Don’t Make Trades)
under Deron’s Report Card is based on the actual price I closed my trade at, not
just the theoretical target or stop price listed for each stock. Open P&L is
based on the closing prices of the most recent trading day.
otherwise noted, average holding time is 1 to 3 days once a position is
triggered. Updates on open positions are provided daily.
Yours in success,
Deron M. Wagner