Commentary:
After rallying off the morning lows in the mid-afternoon, it initially appeared the broad market would close higher yesterday, but the bounce fizzled out, causing each of the major indices to close lower for the third consecutive day. The Nasdaq Composite shed another 0.8% yesterday, bringing its three-day loss to 3.9%. The S&P 500 Index lost 0.4% and the Dow Jones Industrials closed 0.3% lower. Of the three major indices, the Nasdaq has been sustaining the highest percentage losses during the past three days, while the Dow has dropped the least. This is indicative of how the stocks and indices that rally the most are also the ones that drop the fastest when the market finally reverses.
Volume in the NYSE increased by 1% over the previous day’s level, which made yesterday another day of distribution in the S&P and Dow. Total market volume in the Nasdaq declined by 12%, but still came in well above its average level because the prior day’s volume was the highest in eighteen months! Since the new year began, the price to volume relationship in the broad market has been quite bearish. The broad market will eventually bounce, but any short-term rally is not likely to be sustained unless the bounce occurs on higher volume than the massive turnover we have seen during the past three “down” days.
Looking at the daily chart of the Nasdaq Composite, you will see the index closed below support of its 50-day moving average for the first time since September 8, nearly four months ago. In only three days, the index dropped from a three and a half year high to below its 50-day average! Take a look:
Indices rarely collapse below their 50-day moving averages without at least bouncing first. Therefore, expect at least a small rally attempt in the Nasdaq within the next several days, although we don’t expect it to go very far. Looking at the chart above, you can see the 2,150 level will be a key area of resistance due to the overhead supply that was created during this week’s selloff. Resistance of the 20-day MA at the 2,147 area offers a low-risk opportunity to short the Nasdaq, assuming it bounces that far.
Both the S&P 500 and Dow Jones Industrial Average remain above their 50-day moving averages, but, like the Nasdaq, both indices are likely to run into resistance of their 20-day moving averages on any rally attempt. The 20-day MA for the S&P is now at 1,200, and is at 10,700 for the Dow. Any rally to near these levels will provide us with a low-risk short entry on SPY or DIA.
Because the losses of the past three days occurred so rapidly, we are likely to see a technical bounce within the next one to two days. However, unless volume increases during the anticipated bounce, we would view any rally as an opportunity to establish new short positions. By waiting for a retracement, you decrease your risk by selling short into a resistance level, rather than trying to short at the bottom of a range and “hoping” it goes lower. Just as we are usually not interested in buying an ETF that has rallied sharply for three straight days without first waiting for a pullback, we also are not keen on entering new short positions after three days of solid losses. The possibility exists that the broad market could continue lower from here without bouncing, but we will simply wait patiently on the sidelines if that occurs. It’s better to wait for the trade setups that offer a positive risk/reward ratio, rather than chasing the moves and being late to the party. Furthermore, when a market truly is reversing, the second wave down is usually much more dramatic than the first one, so there will be plenty more opportunities for shorting if the weakness remains.
Today’s watch list:
We are looking at a few short candidates in the broad market, but want to wait for a bounce first. As always, we will send an intraday e-mail alert to subscribers when/if we enter any new positions due to intraday bounce into resistance.
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:
We are now flat the ETFs, waiting for a low-risk entry point for new short positions.
Edited by Deron Wagner,
MTG Founder and
President