The Nasdaq Composite resumed its intermediate-term downtrend and sold off sharply yesterday, after last Friday’s failed breakout attempt above the 50-day MA and primary downtrend line. The Nasdaq opened the day near the flat line, but promptly entered into a steady intraday downtrend that caused the index to break below support of the previous day’s low of 2,034 by early afternoon. The downtrend remained intact into the close, which eventually caused the Nasdaq to break last week’s low of 2,020. The Nasdaq Composite closed with a rather steep loss of 1.90% on volume that was marginally higher than the previous day. This means that yesterday was the seventh day of bearish distribution within the past six weeks. We are now beginning to see as many bearish “distribution days” (lower closing price, but on higher volume) as we formerly saw bullish “accumulation days” (higher closing price and on higher volume) only a few months earlier. In yesterday’s Wagner Daily, we pointed out the Nasdaq’s inability to close the week above its primary downtrend line, so a resumption of that trend during yesterday’s session did not come as a big surprise. The updated daily chart of the Nasdaq below illustrates how the upper channel of the primary downtrend remains intact:
As you can see, the near-term support for the Nasdaq is at the 1, 991 to 2,000 price level, which represents the low of February 24. The 2,000 price level formerly acted as psychological support, so a break below the Feb. 24 low of 1,991 would be quite bearish. Next major support below the Feb. 24 low is around the December 2003 lows, near the 1,900 level.
The S&P 500 Index and Dow Jones Industrial Average once again showed initial relative strength to the Nasdaq, but both sold off sharply during the final hour of trading. The S&P closed with a loss of 0.84%, while the Dow gave back 0.62% on volume that was a few percentage points below last Friday. The weakness in the Dow caused the index to close below support of its 50-day moving average for the first time since last November. Friday’s low price support of 10,524 is only five points below yesterday’s close, with the next support at the 10,400 level (January 2004 lows). The daily chart of the Dow below illustrates how the index closed below the 50-day MA for the first time since November 21:
Notice that the bearish “ascending head and shoulder” pattern we pointed out to you last week is still intact. The break below the 50-day MA, along with the break of the head and shoudler neckline, is the reason we shorted DIA for swing trade yesterday afternoon. Our timing was off with last week’s short entry, but it appears the index is finally correcting and the sentiment is changing (based on the break of the 50-day MA).
Last Friday’s failed break of the 1,160 level in the S&P 500 Index may have marked the intermediate-term high for the index, which is now back below support of its 20-day MA and on the way down to its 50-day MA at the 1,136 area. The Small and Mid-Cap Indices were also quite weak yesterday, giving us confirmed negative breadth among all sectors. The broad market was choppy and erratic last week, but it appears that the bears are now winning the battle, as every daily chart of the major indices is now breaking below support.
While there still may be pockets of strength to buy, sentiment has definitely changed to one of “selling into strength” instead of the former mantra of “buying the pullbacks.” Therefore, make sure your account is properly positioned to take advantage of the change in sentiment as well. Remember also to keep an eye on the $XAU (Gold and Silver mining index), which consolidated and absorbed last Friday’s gains. Good chance it will break out again today (reference yesterday’s newsletter for a list of individual stocks within the sector).
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = below 114.85
(below the prior low of March 3)
Target = 112.60 (“swing low” of January 29)
Stop = 115.85 (above the 20-day MA)
Notes = We plan on shorting SPY if the S&P 500 Index breaks its prior low of March 3.
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 March 8) –
shorted 105.65, target 103.80, stop 106.10, unrealized points = + 0.46, unrealized P/L = + $92
Per intraday e-mail alert, we shorted DIA before the close yesterday afternoon, just in time to catch the closing selloff. Updated stop and target price listed above. EWJ long did not trigger.
Founder and President