The broad market sustained another day of selling on heavier volume yesterday, as each of the major indices closed sharply lower and volatility remained high. The S&P 500, Nasdaq Composite, and Dow Jones each spent the first few hours of the day in a sideways trading range, at or just below the previous day’s low, before each of the indices rallied to new intraday highs during the mid-day doldrums. Although the broad market rallied to a new intraday high, the rally lost its steam shortly after each of the major indices entered positive territory. This resulted in yet another wave of high volume selling during the final two hours of the session. The Dow Jones Industrial Average and S&P 500 Index both continued to show the most relative weakness, and each index lost just over 1.5%. The Nasdaq Composite also closed lower on the day, but “only” dropped 1.06%.
The most interesting thing about yesterday is that volume once again surged higher. Total market volume in the NYSE was 1.88 billion shares, which was an increase of approximately 12% over the previous day and a surprising 26% above its 50-day average. It was also the single highest volume day since January 29, about six weeks ago. Volume in the Nasdaq also increased versus the previous day, but only by a few percentage points and not much above its 50-day average. The market is beginning to register so many institutional “distribution days” that we have begun to lose count, but suffice it to say that yesterday’s surge in NYSE volume indicated that the selling momentum behind yesterday’s losses was still heavy. We have compiled an interesting to chart that illustrates the relationship between the losses of the past several days and the corresponding increase in total market volume. On the chart below, we have plotted a daily chart of the S&P 500 Index, while we have also plotted a daily chart of the NYSE total market volume directly underneath. Notice the correlation to the increase in volume over the past several days, as soon as the S&P began selling off sharply. This is what we refer to as institutional “distribution:”
While we often discuss the importance of weekly and daily charts, the use of hourly (60-minute interval) charts can assist you greatly when the market is trending smoothly. If you were only looking at a one-day, five-minute chart of yesterday’s price action in the S&P 500, you may have been fooled into thinking the market was going to rally when the index moved higher in the middle of the trading day. However, a quick look at an hourly chart would have showed you that the mid-day rally was simply a rally into resistance of a downtrend line that formed a few days ago. The hourly chart of the S&P 500 Index below illustrates why the index reversed and headed lower after a failed rally attempt at mid-day:
In yesterday’s newsletter, we cautioned against initiating new short positions without first having a significant bounce in the broad market. Since we once again closed lower, this becomes an even more valid point going into today. While there is no guarantee the market won’t go lower again, you have to consider the risk/reward of initiating new trades. In this case, the potential risk of selling short at current levels is much greater than the potential profit if the major indices were to drop another day. So, even if the market goes lower today, we don’t feel inclined to catch the move on the short side because the risk is simply too high. Instead, we will wait for a correction and look to sell short into any significant price retracement that may occur over the next several days. As we analyzed thoroughly yesterday, the daily charts are now “broken” and each of the major indices is now in a confirmed intermediate-term downtrend. At this point, it would require several days of broad-based gains on huge volume in order to provide us with any reason to become bullish. We’ll take a look at the longer-term “weekly” charts on Monday, after we see how the market closes the week.
Today’s watch list:
OIH – Oil Service HOLDR
Trigger = 10 cents above the high of the first 20 minutes
Target = 72.30 (20-day MA)
Stop = 68.50 (just below the 50-day MA)
Notes = The Oil Service sector has been very strong over the past several moments, as confirmed by gasoline prices at your local station. The index corrected, along with the broad market, over the past several days, but it has now come down to support of both its 50-day MA and its 10-week MA. We therefore expect a bounce in this sector, at least back up to its 20-day moving average. Note that we will buy OIH if, and ONLY IF, it rallies above its high of the first twenty minutes of trading today. If, however, it does not break above its high of the first 20-minutes, we will pass it by. This decreases our risk of buying prematurely.
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.
We were flat overnight, as we did not enter any new positions yesterday.
Founder and President