The major indices endured another day of losses, as nearly every sector, from financials to techs to utilities, fell victim to broad-based selling. Despite the rally attempt the previous afternoon, there was a complete lack of follow-through to the upside, and investors sold into the bounce. This caused the S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite to each lose between 1.6% to 1.8%. Volume increased by 2% in the NYSE, causing yesterday to become yet another “distribution day” in the S&P. Volume in the Nasdaq decreased by 5%, but the broad-based losses gave the day a feeling of institutional distribution. Although we stopped out of our QQQ long position with a small loss, we netted nearly a 3-point gain on the HHH short position, which hit our price target yesterday.
Going into yesterday morning, we outlined our reasons why we felt you could begin “testing the water” on the long side of the market. Specifically, we liked the fact that the Nasdaq was holding onto support of its prior downtrend line that it had rallied above in the prior week. However, yesterday’s selloff caused each of the major indices to break below this trendline support, which means all bets are off on the long side of the market. Not only did the the Nasdaq close below support of its prior downtrend line, but it also broke below its prior significant low of 1829, which was set on July 26. This means the Nasdaq closed at a new low price that the index has not seen since October of 2003, nearly one year ago. Since there is no horizontal price support below current levels, you can draw Fibonacci retracement lines to predict the next major area of price support. If you measure the percentage retracement from when the prior rally began in March 2003 up to the high of January 2004, you will see the support at the following Fibonacci levels (weekly chart below):
As you can see, the Nasdaq closed just above support of its 38.2% Fibonacci retracement. While the 38.2% retracement level often holds, it would be dangerous to buy the Nasdaq right now without any type of volume confirmation. Realize that a break below the 38.2% retracement will probably cause the Nasdaq to quickly drop down to its 50% retracement level, which is at the 1,710 area.
While the Nasdaq closed below its prior low from July 26, the S&P 500 Index (barely) held the prior low. The S&P 500 Index is also once again testing support of its 200-week moving average, which acted as support when the index dropped down to it two weeks ago. If the 200-week moving average fails to hold this time, we anticipate a selloff down to the 1,050 area. Note the importance of the 200-week moving average on the weekly chart below:
We could speculate over all the fundamental reasons why the market has been so weak and unable to sustain a rally, but the actual reasons simply do not matter! That’s why you will rarely see us discussing geopolitical events, economic data, or other news that supposedly moves the market each day. The simple fact of the matter is that a market will go down if the sellers outweigh the buyers, which has been the case for the past two months. Evidence of this can be seen by studying the price to volume relationship of the major indices over the past month. Nearly every “up” day has occurred on lighter volume, while quite a vast number of “down” days have occurred on heavier volume.
If the only technical analysis tool at your disposal was access to reading the market’s price and volume each day, this information alone could provide you with the most important things you need to know. If you did not look at a single chart during the past two months, but carefully recorded and analyzed the broad market’s price and volume measurements each day, you would have been able to predict the current weakness in the market. It’s common sense that a rally cannot be sustained for long if every “up” day in the market is occurring on lighter volume than each of the “down” days. Water flowing down a hill will always follow the path of least resistance, and the direction of the stock market will always do the same. If there are more sellers than buyers, the market goes lower, and vice versa. Volume is the one technical indicator that never lies, which is why we spend so much time discussing volume every day in this newsletter.
Today’s watch list:
There are no new trade setups 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.
HHH short (HALF position, from Aug. 2) –
shorted 53.88, covered 51.10, points = + 2.78, net P/L = + $276
QQQ long (from Aug. 4) –
bought 34.24, sold 33.90, points = (0.34), unrealized P/L = ($148)
We covered the remaining shares of HHH for nearly a 3 point gain because it hit our original profit target. We also stopped out of QQQ.
Edited by Deron Wagner,
MTG Founder and