The major indices gapped open above the previous day’s high yesterday morning, which could have easily positioned the broad market for a bounce higher, but the lows of last week, as well as overhead resistance of the 20-day moving averages, proved to be too much resistance. The market spent the first half of the day chopping around in a narrow range, but began to form an intraday downtrend in the afternoon, as the bulls became nervous about the market’s inability to follow-through to the upside after bouncing off the closely watched 50-day moving averages the prior day. The selling accelerated in the late afternoon and, buy the end of the day, the major indices had each closed below their respective lows of the previous day. This, of course, also means that each of the major indices closed below their 50-day moving averages yesterday.
When a stock or index opens above its high of the previous day, but sells off and eventually closes below the LOW of the previous day, it forms a candlestick pattern that is known as “bearish engulfing,” aptly named because that day’s trading range completely “engulfs” the previous day’s range. Yesterday, this type of pattern was formed on the daily charts of SPY (S&P 500 Index), DIA (Dow Jones Industrials), and QQQ (Nasdaq 100 Index). To illustrate, I have circled this “bearish engulfing” candlestick on the chart of SPY below:
Considering that each of the major indices closed below their 50-day moving averages yesterday and also formed “bearish engulfing” candlesticks, this would normally lead us to expect lower prices the next day. However, the one element that has NOT been confirming the bearish chart patterns is the market’s volume. Once again, total market volume was relatively light compared to what we would expect to see if heavy institutional selling was present. Volume in both the Nasdaq and NYSE came in near the same levels as the previous two days. This indicates that the weakness of the past several days can be attributed more to a lack of buyers, rather than an abundance of sellers. Why does this matter? Because it only takes a few big buyers to step in to cause the market to rally the very next day. Therefore, unless volume sharply increases on a down day, we will remain cautious about being too aggressive on the short side. We shorted DIA yesterday morning, but we did so because our risk/reward was positive due to shorting into resistance, rather than waiting for a breakdown of support. As such, we have an unrealized gain of nearly a point on DIA, but we did not feel comfortable enough to short all three of the broad-based ETFs yet.
Going into today, all eyes will once again be on those 50-day moving averages we have been talking about. The major indices closed below their respective 50-day MAs yesterday, but only by a fraction — certainly not enough to provide us with confirmation of a solid break. Because volume has been light on the downside, don’t be surprised to suddenly see the market rally off yesterday’s lows. Then again, there is a lot of overhead resistance that has been created with the bearish action of the past several days, meaning it would equally take an increase in buying volume to get through the sellers that are lined up along the way. On each of the market’s recent bounces off the 50-day moving averages over the past six months, the major indices have set new highs. But the last bounce that occurred on November 11 resulted in the major indices forming a “lower high,” which means that odds are increased that the 50-day moving averages will be broken this time around. If today closes below yesterday’s lows, it will be quite bearish and we would use Fibonacci to predict the next support level. Otherwise, be prepared for a choppy session. We will continue to “trade what we see, not what we think,” and will be taking it easy on both sides of the market until we see volume increase in one direction or the other.
Today’s watch list:
There are no new plays for today.
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 (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.
DIA short (from Nov. 18) –
shorted 97.38, new stop at 97.07, unrealized points = + 0.83, unrealized P/L = + $166
EWJ long (1/4 position, from Nov. 17) –
bought 8.71, stop at 7.90, unrealized points = (0.05), unrealized P/L = ($20)
Per intraday e-mail alert, we shorted DIA yesterday morning and have lowered the stop as per above.
Edited by Deron Wagner,
MTG Founder and President