Commentary:

Tuesday’s broad-based gains were short-lived, as each of the major indices sold off sharply yesterday afternoon. Rather than building on the previous day’s reversal, the broad market trended lower yesterday morning, then accelerated to the downside during the late afternoon. The Nasdaq Composite suffered a 1.5% drop on volume that was 12% higher than the previous day. The increase in volume, but negative closing price, means the index registered its fifth day of institutional distribution since the new year began. The S&P 500 and Dow Jones Industrial Average dropped 0.9% and 0.8% respectively, although volume in the NYSE declined by 6%.

Taking a look at the daily chart of the Nasdaq, you will see that yesterday’s losses caused the index to give back its gains of the previous two days. The 50-day moving average still stands firm as overhead resistance, but now the bulls who anticipated a reversal will also increase the amount of supply the index needs to contend with. There is a bit of support, but the index is hanging on by only a small margin, as a small selloff will cause the Nasdaq to set a new low for the year. The daily chart below illustrates this:

The S&P 500 has a similar pattern to the Nasdaq, but has a bit more support below yesterday’s closing price. Regardless, yesterday’s action was negative because it pushed the index back down below its 50-day moving average, which has become an important area of resistance. Notice also how the index was unable to rally back above its 20-day moving average:

Two weeks ago, we discussed the fact that the upcoming period of corporate earnings was likely to determine the short-term direction of the markets. Since then, we have seen solid earnings reports from Intel, IBM, and Apple, but the reaction has been negative in each case. Last night, former market leader eBay announced they missed their earnings estimate and lower forward guidance for the first time that we can remember. In the after-hours session, eBay was trading 12 points lower. The point is that, regardless of how well the reports have been thus far, the market’s reaction has been largely negative. In a bullish environment, mediocre earnings reports will often generate a positive market reaction, but a bearish sentiment will often lead to negative outcome no matter how good the earnings reports. Therefore, we feel the market’s lack of positive reaction to earnings season thus far is telling us we may be in for an extended period of correction. Watch for a break to new lows of the month on the major indices, which could get ugly if volume increases once again.

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Today’s watch list:

We are stalking SPY and DIA for potential shorts, but we want to see if the large pre-market gap down holds before initiating new short positions. As always, we will send an e-mail alert when/if we enter any new positions.

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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:

SMH long (from Jan. 14) –
bought 31.38, sold 31.04, points = (0.34), net P/L = ($102)

Open Positions: none

Notes:

Per intraday e-mail alert, we tightened the stop on SMH, which was hit yesterday.

Edited by Deron Wagner,
MTG Founder and
President