Commentary:

The S&P 500 and Dow Jones Industrial Average both suffered their second consecutive “distribution days,” as both indices dropped 1.0% yesterday, and on volume that was 12% higher than the previous day. Relative strength in the Computer Networking and Semiconductor indices helped keep the Nasdaq’s losses in check, but the index still shed 0.6%. Total market volume in the Nasdaq rose by 9%, which gave the Nasdaq Composite a bearish “distribution day” as well. Each of the major indices closed near their intraday lows, which typically is a bearish sign of institutional selling.

From a purely technical basis, the worst thing about yesterday’s session was that both the S&P and Dow closed firmly below their respective multi-year breakout levels that both indices registered last Friday. In yesterday’s newsletter, we talked about the importance of both indices holding above those levels, as the prior resistance should have become the new support. Needless to say, the fact the S&P and Dow both closed below last Friday’s breakout levels does not bode well for the broad market, especially when you consider that the selloff also came on significantly higher volume.

While studying the markets after yesterday’s close, we noticed there seems to be a fair amount of sector rotation taking place. Sectors that have been leading the broad market for the past six months to a year are now showing major weakness, while sectors that were formerly lagging the market are now beginning to show strength. In particular, sectors such as Oil, Oil Service, Home Construction, Steel, and Utilities are all breaking or about to break support of their daily uptrend lines. However, the Semiconductor ETF (SMH) actually closed slightly higher yesterday and is still within striking distance of a major breakout above its prior high from last December. Another sector that is showing relative strength is the Computer Networking stocks, which can be tracked by the index ticker $NWX. Rather than attempting to predict the direction of the braod market, consider entering short positions in those sector ETFs that are now showing weakness, while buying those that are seeing money inflows. We are already long QQQQ and SMH, and are in the process of considering new short entries in the sectors that are now showing weakness. We’ll look at some individual sector charts in the coming days.

Because of the S&P and Dow’s break below their prior highs, it appears that both indices may have had “failed breakouts” at their respective highs, although it is still a bit too early to confirm. Regardless, caution is definitely now warranted on the long side of the market, especially in the S&P and Dow-related sectors. The Nasdaq is still trying to hang in there, but is so much overhead supply the index will now have to contend with. It may be a bit too soon to start aggressively entering new short positions, but definitely keep those stops in place on any long positions you may have. We’ll begin looking at new short possibilities if the S&P and Dow remain below their prior breakout levels from last Friday. If they do, the next major bounce could present an opportunity to enter low-risk short positions, particularly if the bounce occurs on lighter volume. As an aside, remember that Intel reports its quarterly earnings after the close today.

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Today’s watch list:

There are no new plays for today, but we remain long 1/2 position SMH, full PPH, and full QQQQ.

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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:

(none)

Open Positions:

SMH long (HALF position, from Feb. 7) –
bought 32.55, stop 33.20, no target (trailing a stop), unrealized points = + 1.51, unrealized P/L = + $226

PPH long (from Feb. 22) –
bought 72.19, stop 71.85, target 76.75, unrealized points = + 0.41, unrealized P/L = + $41

QQQQ long (from March 7) –
bought 38.07, stop 37.25, target 39.95, unrealized points = (0.50), unrealized P/L = ($200)

Notes:

Per yesterday’s newsletter, we are now long QQQQ.

Edited by Deron Wagner,
MTG Founder and
President