Commentary:
The bearish technical signals we have been warning about for the past week finally caused the market to lose key support yesterday, resulting in significant losses in each of the major indices. The Nasdaq Composite lost 3.1%, the S&P gave back 1.9%, and the Dow Jones lost 1.6%. Total market volume sharply increased by approximately 19% over the previous day, which was an up day. This confirms that yesterday was a bearish distribution day, which signifies institutional selling. It was the first obvious distribution day since June. Breadth was very negative across the board, with tech and biotech stocks getting hit the hardest. As such, it was the Nasdaq’s heaviest percentage loss since March 24, exactly six months ago! Although not a good day for long-term investors, it was a great day for short-term traders because, once the market broke support, it trended steadily lower throughout the entire day without even a minor bounce. Volume surged into the close and the major indices closed at their intraday lows. This enabled intraday traders to ride the profits on short positions and also caused our short positions in DIA and MDY to become solidly “in the money.” Hopefully you have been paying attention to our bearish warnings of the past week and were able to profit from yesterday’s selloff with short positions.
Yesterday’s high-volume selloff caused some very important technical damage to be done in each of the major indices. First of all, the S&P 500 Index, the Dow Jones Industrial Average, and the Nasdaq Composite each closed firmly below support of their respective 20-day moving averages. Although the indices have been bouncing off their 20-day MAs several times in recent weeks, yesterday marked the first time since the beginning of August that the indices actually closed below their 20-day MAs.
More importantly, both the S&P 500 Index and the Dow Jones Industrial Average closed below support of their primary uptrend lines that have been in place since the rally began in March! The Nasdaq 100 Index, which has been showing relative strength, closed below its 20-day MA as well, but is still above its primary uptrend line from the March lows. I have annotated these breaks of the primary uptrend lines on daily charts of SPY (S&P 500 Index), DIA (Dow Jones Industrials), and QQQ (Nasdaq 100 Index) below:
Obviously, a technical break of an uptrend that has been in place for six months on the S&P and Dow is very important and indicates that the market is now poised to see a more significant price correction. However, the Nasdaq is still holding above its primary trend line and has only broken its more steep secondary uptrend line. Nevertheless, it is becoming more likely that the broad market will eventually see at least a 38.2% Fibonacci retracement from the lows of March to the highs of September. Continue to watch the market’s volume patterns for clues as to whether the market is likely to follow through on yesterday’s selling.
When coupled with the fact that it was only last week when the broad market briefly set new 52-week highs, the picture is even more bearish because it confirms a failed breakout to new highs. Combined with the opening gap down of September 22, the bulls who were “late to the party” and were recently buying the market have now become trapped. This means that yesterday’s selloff has caused significant overhead resistance in the markets from the bulls who are now trapped. Any rally attempt by the market is likely to be met by selling, making it likely that the markets close this week at or below their current prices. This is how reversals take place in markets. If you are not already short from yesterday, be careful about entering new short positions today because the market could easily correct and bounce from yesterday’s lows. However, we view any bounce as a chance to sell into strength to unload long positions and initiate or add to short positions. Good chance the market trades sideways and corrects by time today. If, however, the broad market breaks yesterday’s lows and trends lower again, watch the 50-day moving averages to provide the next support for the major indices. Also note that Initial Unemployment and Durable Goods reports are both due out before the open and could impact the tone of today’s trading. Remember to always honor your stops on both long and short positions and don’t fight what the market is telling you!
Today’s watch list:
We are looking at shorting SPY, as well as a few other ETFs today. However, since yesterday’s selloff was so severe, we want to see a bounce to sell short into rather than shorting here at the lows. Therefore, rather than listing a specific entry price, we will simply e-mail you an intraday alert when/if we enter any new positions today. Otherwise, we will simply manage our two open short positions in MDY and DIA.
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
Model.
Closed Positions:
-
DIA short (1/3 position size, from Sept. 23) –
shorted 95.38, covered 94.36, net points = + 1.02, net P/L = + $66
Open Positions:
-
DIA short (2/3 position size, from Sept. 23) –
shorted 95.38, new stop at 95.40, target 94.20, unrealized points = + 0.94, unrealized P/L = + $125
MDY short (from Sept. 22) –
shorted 96.25, new stop at 96.30, target 94.25, unrealized points = + 0.85, unrealized P/L = + $85
Notes:
Per intraday e-mail alert, we covered 1/3 of the share size of DIA yesterday in order to lock in profits because DIA approached our profit target. However, we took the remaining 2/3 share size overnight, as well as the full position size of MDY. Notice the new stops for both DIA and MDY, listed above. We will keep you updated via e-mail to any other changes.
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
change.
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
updates.
SOH = Sit On Hands (Don’t Make Trades)
Closed P&L
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.
Unless
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