The broad market followed through on Monday’s weakness yesterday, though the session was much less volatile. The major indices opened nearly flat, trended modestly lower throughout the day, and eventually closed at their lowest levels of the session. The S&P 500 Index lost 0.4%, while both the Nasdaq Composite and Dow Jones Industrial Average closed 0.5% lower. Each of the indices also closed just above their respective lows of the previous day, which means they may find mild support at those levels over the next day or two. No particular sector showed much strength yesterday, and nearly every sector on our watchlist closed lower on the day. There were also a few sectors that showed relative weakness to the broad market. The Gold and Silver Mining Index ($XAU) closed 3% lower yesterday, but it was a normal correction from the sectors impressive rally over the past four months. The Retail Index ($RLX), which sold off on Wal-Mart’s disappointing report on Monday, dropped another 1.9%. The Utility sector ($DJU), which we mentioned yesterday morning as a short sale idea, also closed 1.4% lower.
Total market volume in the NYSE increased by 14%, but volume in the Nasdaq was on par with the previous day’s level. Because the S&P and Dow both closed lower, but on higher volume, yesterday was technically a bearish “distribution day,” which pointed to institutional selling (aka “distribution”). Breadth ratios, which came in at the worst levels we’ve seen in quite a while, also confirmed the bearish overtone. Declining volume outpaced advancing volume throughout the entire day in the NYSE and closed at a negative ratio of 1.39 to 1. This time, however, the Nasdaq did not show bullish divergence.
When we initiated the short positions in both SPY and DIA, we were anticipating a short-term price correction down to their respective 20-day moving averages. However, the lack of a sharp selloff has resulted in a mostly sideways “correction by time” that has enabled the 20-day moving averages to rise up to meet the price of both the S&P 500 and Dow Jones. When in an uptrend, a “correction by time” is more bullish than a “correction by price” because it indicates a temporary absence of buyers as opposed to an abundance of fresh sellers into strength. As such, we have tightened our stops on these short positions because the 20-day MAs could now act as support and prompt another rally out of the new base. Both positions are near our short entry points, so there is no harm done, but tightening the stops will keep our risk to a minimum. Below is a daily chart of DIA (Dow Jones Industrial Average) that illustrates how the 20-day MA has risen up to provide support. Also note the horizontal price support that has formed at the $104 area (annotated by the horizontal blue line):
The chart of DIA above is telling us that we need to cover quickly if it does not break below the $104 area because it easily rally from this area. However, a high volume selloff below the horizontal price support at $104 would probably result in an equally sharp move to the downside. If you’re short the broad-based ETFs like SPY or DIA, the point is should cover your short positions quickly if the major indices fail to close below their lows of the past two days. Of course, let the profits ride if they do break support. While we now advise caution on the short side, we are NOT comfortable recommending new long positions in the broad-based ETFs due to the S&P’s break of its daily uptrend line yesterday. Due to the new overhead resistance of that prior uptrend line, the S&P 500 is likely to have a bit of trouble quickly breaking out to new highs if it rallies from here.
In yesterday’s Wagner Daily, we mentioned that we liked the idea of creating a synthetic ETF by shorting a small basket of stocks in the Home Construction Index ($DJUSHB). The most important thing we noted in the daily chart of the index was a failed consolidation at the highs, which occurred on Monday. The index subsequently corrected by time yesterday, and most stocks in the index closed at Monday’s lows. We now feel that shorting the Home Construction stocks will provide a positive risk-reward ratio if the $DJUSHB index breaks below the low of the past two days. Such a move would also represent a break of 20-day MA support, as well as support from the prior highs of September. The blue horizontal line on the daily chart below illustrates the break of support we are looking for in order to feel confident about shorting. The highlighted circle illustrates the failed break of consolidation at the highs:
If you would like to scan the charts of the stocks in this sector, consider shorting the ones that have overhead moving average resistance, as opposed to those that are near new highs. The stocks in the index that trade at least 400k average daily volume are: PHM,
DHI, LEN, KBH, CTX, TOL, HOV, RYL, SPF, CHB, BZH, and MDC.
On another note, please be aware that QQQ (Nasdaq 100 Index Tracking Stock) will no longer trade on the American Stock Exchange and will instead begin trading on the Nasdaq exchange effective today, December 1. The new symbol will be QQQQ, rather than QQQ. We view this as a very positive change because we can now get better prices on our order entries and exits due to the extensive use of electronic communication networks (ECNs) such as INET or ARCA, as opposed to trading through a specialist. QQQQ will only be the second ETF to trade on the Nasdaq exchange; ONEQ (Nasdaq Composite Index Tracking Stock) is the other one.
Today’s watch list:
(There are no new trade setups for today, although we remain short half positions of SPY and DIA, long PPH.)
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.
DIA short (HALF position, from Nov. 23) –
shorted 104.65, new stop 105.30, target 102.45, unrealized points = + 0.32, unrealized P/L = + $32
SPY short (HALF position, from Nov. 23) –
shorted 117.87, new stop 118.80, target 116.10, unrealized points = (0.02), unrealized P/L = ($2)
PPH long (from Nov. 30) –
bought 69.10, stop 67.55, target 72.90, unrealized points = (0.30), unrealized P/L = ($30)
PPH triggered yesterday. We also have tightened the stops on both the DIA and SPY short positions (only half size positions now).
Edited by Deron Wagner,
MTG Founder and