Due to Monday’s strong close, the major indices gapped up to start yesterday on a strong note, but the enthusiasm quickly vanished, as the broad market spent the remainder of the day trending steadily lower. Both the S&P 500 and Nasdaq Composite shed 0.8% yesterday and closed at their lowest levels since February 23. The Dow Jones Industrial Average lost 0.5%. Despite closing at their intraday highs the previous day, all three of the major indices closed at their intraday lows yesterday. When markets rally one afternoon and close at their best levels of the session, but sell off the following afternoon and close at their worst levels of the day, it is further confirmation of the broad market’s indecisive nature we have been discussing for the past week. This type of market action is proof that now is not a good time to be aggressive on either side of the broad market.
Total market volume in both the NYSE and Nasdaq increased by approximately 6% over their prior day’s level, causing yesterday to register as another bearish “distribution day.” Within the past month, there have been six days of higher volume selling (aka “distribution days”) in the NYSE and five in the Nasdaq. Conversely, the few “up” days over the past several weeks have been on lighter volume. When a market is experiencing numerous days of institutional selling on the “down” days, but lacking institutional buying on the “up” days, it’s not difficult to anticipate the outcome. Because institutional money accounts for approximately 80% of the daily volume on the primary exchanges, markets will eventually move in the direction of the institutional pressure. It is for this reason that we pay so much attention to the broad market’s relationship between price and volume on a daily basis. We can determine whether to be net long or short based on whether the markets are experiencing more “accumulation” or “distribution” days because it is never wise to trade in the opposite direction of the institutions. Remember that volume is typically a leading indicator that can predict changes in the market’s direction.
One industry sector you may want to pay attention to is the U.S. Home Construction Index ($DJUSHB), which is poised to break below support of its 50-day MA for the first time since October 2004. The housing stocks have been on fire for a very long time, but it appears they may finally be poised to correct, at least in the short-term. For the past four days, the index has been attempting to rally off support of its 50-day moving average, but is failing to make any headway. Instead, it is now consolidating at its lows, just above the 50-day MA. Therefore, we anticipate the strong possibility of a breakdown below that 50-day MA support level. The daily chart of $DJUSHB below illustrates this:
If the selloff below the 50-day MA occurs, you could see substantial moves lower in many of the housing stocks. There is not an ETF that tracks the sector, but you can create your own “synthetic” ETF by trading a small basket of the leading stocks in the group. Individual ticker symbols to consider are (in no particular order): RYL, KBH, BZH, LEN, DHI, TOL, PHM, and CTX. In the Morpheus Capital hedge fund, we have just established short positions (with small size) in RYL, LEN, and KBH.
Yesterday’s selloff in the S&P 500 caused the index to close just below support of its primary uptrend line that began with the low of October 2004. If the index fails to recover within the next day or two, we may see a substantial move to the downside that would potentially allow us to profit from a short in SPY (S&P 500 Index Tracking Stock). However, despite the break of the uptrend line, note that support of the 50-day moving average is only three points below yesterday’s close of 1,197. Because the 50-day MA is usually a powerful support level, the S&P may continue to be choppy even if it continues heading lower. If the S&P does manage to break below its 50-day MA, the next area of minor support is the prior low from February 24. Below is a daily chart of the S&P that illustrates yesterday’s break of its uptrend line, as well as the next area of support:
The Dow Jones closed yesterday below its uptrend line as measured from the January low, but it is still a few points above its corresponding uptrend line from the October 2004 low. Therefore, between the S&P and Dow, it is probably a better bet to short SPY rather than DIA (Dow Jones Tracking Stock). But better yet, cash continues to make the most sense because the S&P still has its 50-day MA just below and could continue to chop around.
QQQQ (Nasdaq 100 Index Tracking Stock) never managed to get above its 50-day MA for more than one day on its last attempt, but has been holding above its 200-day MA ever since it first touched it during its January 24 low. Take a look:
A break below the 200-day MA would be quite bearish for QQQQ and would likely trigger a sharp institutional selloff. Therefore, we recommend you keep a close eye on this primary support level. Realize, however, that our bias remains mostly in cash. We just want to point out some of these trade ideas for more advanced traders who may be looking for a higher-risk opportunity.
Today’s watch list:
There are no new plays for today, although we may short SPY later in the day IF, and only IF, it loses support of its 50-day MA. We are also considering a short in IWM (Russell 2000 Index Tracking Stock), which has a similar setup to SPY short. Because the market remains choppy and indecisive, we are not yet listing SPY and IWM as “official” trade setups. However, we will send an intraday e-mail alert to subscribers if/when we enter either of these trades.
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 remain flat.
Edited by Deron Wagner,
MTG Founder and