Commentary:
The Nasdaq Composite Index suffered its third consecutive “distribution day” yesterday, as the index dropped 1.5% on volume that was 16% heavier than the previous day. Yesterday was the fifth day of institutional distribution within the past two weeks, and yesterday’s volume in the Nasdaq was the highest since January 29, the third day of this year’s correction. Breadth was quite negative too, as declining volume outpaced advancing volume by a margin of 5 to 1. Both the S&P 500 Index and Dow Jones Industrial Average fared slightly better. The S&P and Dow Jones both closed with losses of approximately 0.8%, but volume was virtually the same as the previous day (which was also a “distribution day”). While the current week began as a tug-of-war between the bulls and bears, the recent days of high volume institutional selling suggest the bears are winning the battle.
Yesterday’s selloff in the broad market caused each of the major indices to break and close below their prior lows from last week, which were set on April 21. This new “lower low” confirms that the primary downtrend lines on the daily charts, which we have been discussing extensively, have once again held firm as resistance. This is likely to cause a continuation of the downtrend that began in January for the Nasdaq, and February for the S&P 500 and Dow Jones Industrials. After several days of heavy selling, the major indices could easily bounce today, but the reality is that we are now likely to see a re-test of the prior lows that were set in mid-March.
In yesterday’s newsletter, we listed SMH (Semiconductor HOLDR) as a possible long play because we had anticipated the possibility that the Semiconductor Index ($SOX) would form a double bottom at its prior lows from April 21. However, the $SOX index promptly showed relative weakness on the open and never hit our trigger price for entry. More importantly, yesterday’s 2.2% loss in the $SOX caused the index to break and close firmly below its prior lows from March. Since the $SOX index usually leads the Nasdaq, this breakdown to a new low is definitely not good news for the Nasdaq, which is still above its March lows. Below are daily charts of both the Semiconductor Index and the Nasdaq Composite Index. Notice how the $SOX index (the top chart) has already broken below its March low, but the Nasdaq (bottom chart) has not (yet):
In the chart above, I removed the moving averages so that you could more easily see the comparison of the March lows, but it is important to note that the 200-day moving average for the Nasdaq is at 1932, only 26 points below yesterday’s closing price. While the 50-day moving average is commonly used as a support or resistance point for determining intermediate-term trends, the 200-day moving average is extremely important with regard to the long-term trend of an index. Therefore, a break below the 200-day moving average would be very bearish for the Nasdaq and would greatly increase the possibility that the index remains in a downtrend for an extended period of time.
As for short-term support and resistance levels on the major indices, last week’s lows, which were broken yesterday, are now likely to act as resistance on any rally attempt today. Resistance will be found near the following levels today: S&P 500 – 1,118 (112.20 for SPY), Dow Jones – 10,290 (103.10 for DIA), Nasdaq Composite – 1,973 (35.80 for QQQ, which is Nasdaq 100). You may want to consider either initiating short positions or selling any remaining long positions into these resistance levels. As for support, yesterday’s lows will obviously be the first are of support. Below that, there really is not much price support until the March lows, which are well below yesterday’s closing price. Like we mentioned earlier, the broad market could easily bounce today because of the severity of the selling the past several days. However, given the high volume distribution of the past several days, any rally attempts are prone to fizzling out, so be quick to take profits and cut losses on the long side.
Today’s watch list:
OIH – Oil Service HOLDR
Short
Trigger = above 70.20 OR below 69.25 (rally into resistance or breakdown below support)
Target = 66.80 (prior low on daily chart)
Stop = 71.30
Notes = The Oil Service Index has formed its first “lower high” on the daily chart and its uptrend now appears to be fading. We will therefore short either on a rally into moving average resistance, above 70.20, or on a breakdown below support at 69.25, whichever comes first.
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.
Closed Positions:
-
(none)
Open Positions:
-
(none)
Notes:
No new positions were entered yesterday, and we patiently remain flat.
Edited by Deron Wagner,
MTG Founder and
President