As expected, the major indices staged a relief rally last Friday and recovered some of their heavy losses that were sustained earlier in the week. The Nasdaq Composite Index, which had lost more than 5% in the prior five days, rallied to close 2.1% higher on Friday. While the week ended on a somewhat bright note, the index still lost 3.1% for the week. Even less encouraging was that volume dropped by a whopping 23% compared to the previous day. At 1.7 billion shares, it was the lightest day since February 17. The surge in volume during the previous five days enabled total market volume to register well above its 50-day average. But, Friday’s volume was the first day since March 4, before the heavy selling began, that volume came in below its 50-day average. This tells us there was a complete lack of institutional buying support by mutual and hedge funds on Friday. It’s more likely that the gains were largely the result of institutional short covering and some retail “bargain hunting.” Friday’s price to volume relationship in the Nasdaq was simply a continuation of what we have been seeing for the past six weeks; lower volume on the up days and higher volume on the down days. As long as that pattern remains intact, our bias remains to the short side in the intermediate term.
Looking at the longer-term weekly chart of the Nasdaq Composite, you will notice that the 200-week moving average continues to act as a concrete wall of resistance that has been preventing the index from rallying for the past seven weeks. The 10-week moving average, which formerly acted as support during the rally of the prior 11 months, has now become overhead resistance as well. On a positive note, the 1,980 level should provide some price support for the Nasdaq in the coming week. The weekly chart of the Nasdaq below illustrates this:
Like the Nasdaq, both the S&P 500 Index and Dow Jones Industrial Average rebounded on Friday with gains of 1.25% and 1.10% respectively. For the week, the S&P 500 Index lost 3.1% and the Dow shed 3.4%. Not surprisingly, volume in the NYSE was also weak on Friday and clocked in 26% lower than the previous day. You know what the sharp drop in volume in the Nasdaq meant, and it was the same story in the NYSE.
For the S&P 500, last Friday was the first weekly close below its 10-week moving average since the minor correction we saw the week of September 26, 2003. One crucial difference between that correction and the current one is that the price to volume pattern is much more bearish now than last September, which barely saw any distribution days. Interestingly, the S&P 500 closed just above support of its 200-week moving average, which is usually quite a substantial support/resistance pivot. Keep an eye on how the S&P acts around its 200-week moving average in the coming week. Here’s a quick look at the S&P weekly chart:
The weekly chart of the Dow is similar to the S&P in that it was the first weekly close below its 10-week MA in many months. The one difference, however, is that the Dow has further to fall before it comes into support of its 200-week moving average. This can be attributed to the fact that the Dow rallied faster and harder than the S&P for the better part of last year. What goes up the fastest typically comes down the fastest as well. As you can see on the weekly chart below, the 9,800 level is the next major area of support for the Dow, although odds are good it would take several weeks (or more) until the Dow saw that level:
As you can see from the weekly charts above, each of the major indices have broken key support levels during the selloff of the past week. Primary uptrend lines on the daily charts are broken, as are key moving averages such as the 50-day and 10-week. More importantly, the indices have sold off on much higher volume than in the past. This tells us we are likely to be in for an intermediate-term correction rather than a quick pullback and rally to new highs, as we have become accustomed to since March of 2003. To profit from the change in the market’s environment, consider using any rallies to major resistance levels as a low-risk entry point to initiate new short positions in various sector and broad-based ETFs. Just as buying each pullback works well in an intermediate-term uptrend, selling short into each rally works equally well in a downtrend. That’s the beauty of being a short-term trader, rather than a long-term investor who typically only buys stocks rather than shorting them.
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.
We were flat overnight, as we did not enter any new positions yesterday. The OIH setup closed higher on Friday, but never rallied above its high of the first 20 minutes, so it did not meet our entry criteria. We will be watching OIH today for possible entry, which we would e-mail alert to you.
Founder and President