The broad market sold off sharply last Friday, causing the Nasdaq to give back its gains of the prior two days and forcing the Dow Jones Industrials to close at a new low of the year. The Nasdaq Composite experienced losses in nearly every sector and closed 2.0% lower, the S&P 500 Index lost 1.0%, and the Dow Jones Industrials shed another 1.1%. However, total market volume in the Nasdaq was 16% lighter, while volume in the NYSE came in 12% lighter than the previous day. Considering that the Nasdaq gained 1.1% on a whopping volume increase of 22% the previous day, the one “bright spot” of Friday’s loss was that it occurred on lighter volume. If you look solely at the price action of that past two days, Friday’s 2.0% loss was worse than the 1.1% gain of the previous day, but remember that volume always reveals what is really going on “under the hood,” and is the one technical indicator that never lies.
Throughout most of last week, we emphasized caution on both sides of the market and have been advocating a mostly cash position due to indecision in the markets. Last Friday’s market action was a clear example of this, and the market action is proving that our cautious stance is becoming more and more warranted. The extreme divergence between the major indices continues, which is responsible for the erratic and choppy market action we have been experiencing. As an example of this divergence, compare the daily charts of the Dow Jones Industrial Average with the Nasdaq Composite:
As you can see, the Nasdaq Composite once again found resistance at its 200-day moving average (the purple line), which it ran into after last Thursday’s rally. This resulted in a big red candlestick on Friday, which correlated to a complete loss of the prior two days’ gains. It now appears that a “lower high” may be forming on the Nasdaq, but the index did manage to close last week above support of its primary uptrend line (the upward sloping blue line), which is bullish. However, notice how much weaker the Dow Jones Industrials have been:
Looking at the Dow, forget about resistance of the 200-day moving average and support of its primary uptrend line because the index is trading well below both of those levels. In fact, notice that the Dow closed below support of its prior low from August, which was 9,783 (circled on the chart above). Because the index closed below its August low, it also means the Dow closed at a new low of 2004. The last time the index was trading this low was November of 2003. Finally, take a look at the S&P 500:
The S&P has not been as the strong as the Nasdaq, but has been stronger than the Dow. Notice how the index is trading roughly in the middle of its range from the August low to the October high. The S&P 500 is basically in “no man’s land,” although it did close last week below support of its prior low, which was the 1,100 level. The weekly chart of the S&P 500 is also showing a lower close for the past three weeks.
When you look at how divergent each of the three major indices have been, it’s no surprise that the overall market action has been so neurotic and indecisive. As the Nasdaq attempts to rally and maintain its uptrend, the Dow Jones acts as an anchor on the index. Conversely, any selloff attempt by the Dow and S&P has been buoyed by the relative strength in the Nasdaq. Needless to say, this does not make trading conditions very much fun because any trends, both up and down, have been so short-lived. So, although it’s boring, we continue to maintain a mostly cash position going into this new week. In times of indecision, cash is always king because capital preservation should always be your FIRST and PRIMARY concern. Remember that we are still in the midst of earnings season, which only compounds the situation even more. However, the passing of earnings season may result in some of the indices coming more into parity with each other, which should make trading conditions easier as well.
As an aside, watch the gold and silver mining stocks on the long side today because Spot Gold is breaking out to a new multi-year high overnight, and the Euro is testing its all time highs versus the dollar as well. More about this in tomorrow’s newsletter, but just wanted to give you a heads up.
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 over the weekend.
Edited by Deron Wagner,
MTG Founder and