A weaker than expected employment report in last Friday’s pre-market triggered a sharp opening gap down in the broad market, of which the major indices failed to recover from. After the opening bell, the S&P 500, Nasdaq Composite, and Dow Jones Industrials each slid further during the first thirty minutes of trading, then settled into a narrow, sideways range that lasted for four hours. Upon correcting by time, the major indices each dropped to new intraday lows during the final ninety minutes of the session and eventually closed at their worst levels of the day. Like the previous day, last Friday was marked by broad-based selling that affected nearly every sector. Both the S&P 500 and Dow Jones Industrials lost 1.5% on Friday, while the Nasdaq Composite shed 2.5%. Volume in both the NYSE and Nasdaq increased by approximately 8% over the previous day’s levels, which made Friday yet another bearish “distribution day” in the broad market.
Last week was ugly for the bulls, as the Nasdaq lost 5.9%, the S&P 500, 3.4%, and the Dow Jones Industrials 3.2%. Since its most recent peak on June 30th, the Nasdaq is down 14% and has closed near its lows in 5 of the past 6 weeks. All three of the major indices closed last week firmly below their prior “swing lows” from July, and at new lows of the year. Because the prior lows from July have been broken, there is not any short-term horizontal price support at which the broad market is likely to find support. Furthermore, the prior lows from July will now act as resistance if the major indices attempt to rally. The daily chart of the Nasdaq Composite below illustrates the break below the prior low, which is now the new resistance level around the 1,830 level:
As for the next major area of support, you need to look at the longer-term monthly chart, which shows trendline support from the low of October 2002, connected with the low from March 2003. This correlates to support being around the 1,700 – 1,710 area, which also represents a 50% Fibonacci retracement from the low of March 2003 to the high of January 2004 (see last Friday’s newsletter for illustration of Fibonacci support):
The Nasdaq has already corrected beyond its 38.2% Fibonacci retracement level and is probably headed down to support of its 50% retracement. However, both the S&P 500 and Dow Jones Industrials have yet to even correct down to their 38.2% Fibo retracements. Therefore, it is a good idea to make a note of where this support level will be. For the S&P 500, support of the 38.2% retracement is around the 1,018 area. The same area of support on the Dow is around 9,458. The weekly charts below illustrate the Fibonacci support levels:
Needless to say, last Friday’s break to new lows of the year means this is NOT the time to be trying to pick a bottom. The broad market will eventually put in a sustainable rally that lasts more than a few days, but we need to wait until there are at least a few signs this will occur. The beginning of last week gave us a low-risk entry point on the long side of the market, but the heavy, broad-based selling of Thursday and Friday invalidated any long entries because the prior lows of July were broken. Conversely, you’re probably a bit “late to the party” if you begin to aggressively put on new short positions at current levels without waiting for at least a little bounce. Therefore, we are perfectly content to remain mostly in cash for the next several days and let the market stabilize.
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.
We were flat over the weekend.
Edited by Deron Wagner,
MTG Founder and