Bearish momentum from Tuesday’s losses accelerated yesterday, as stocks in nearly every sector plummeted, causing extensive technical damage to the charts of the major indices. The Nasdaq Composite lost 1.7% and the S&P 500 dropped 1.5% yesterday, the biggest percentage losses in both indices since April 15 of this year. The Dow Jones Industrial Average closed 1.2% lower. Although those losses were quite substantial, they paled in comparison to the wreckage in the small and midcap indices. The S&P Midcap 400 Index lost 2.3%, while the Russell 2000 Smallcap Index collapsed and registered a whopping 2.9% loss! It was the largest single day loss in the Russell 2000 since the index shed 3.8% on October 9, 2002. Interestingly, that day’s closing price was also the lowest of the past seven years. Fortunately, our decision to short IWM (Russell 2000 Smallcap Index) two days ago is now paying off nicely. As of yesterday’s close, the trade is showing a marked to market gain of 2.33 points and is nearing our initial downside profit target.
Total market volume in the NYSE increased by 7% yesterday, giving the S&P and Dow their third consecutive days of distribution and the sixth within the past month. The Nasdaq managed to escape having another “distribution day” thanks to a 2% decrease in volume. Nevertheless, market internals were extremely bearish in both exchanges, particularly in the S&P and Dow. In the NYSE, declining volume exceeded advancing volume by a staggering ratio of more than 10 to 1! The Nasdaq’s ratio was negative by “only” 7 to 2. Quite frankly, we don’t ever recall seeing declining volume outnumber advancing volume by a ratio as high as we saw in the NYSE yesterday!
Over the past several days, we have noticed extreme weakness in the formerly market leading sectors such as Oil, Utilities, REITs, and Home Construction, each of which suffered quite sizable losses the past two days. Every sector that rallies sharply for a multi-year period eventually sees its peak and reverses. However, it is very risky to short these sectors without first having confirmation that a top has formed. When the first major correction comes in market leading sectors, corrections of at least 20% are common, but timing is the key. Therefore, we will be stalking OIH (Oil Service HOLDR), XLU (S&P Utilities SPDR), and IYR/ICF (Real Estate Indexes) for low-risk short entry points over the next several days. Each of those sectors have already dropped sharply in the short-term, so we want to see at least a small bounce or price consolidation before entering new short positions. On a side note, the Home Construction Index ($DJUSHB), which we analyzed yesterday morning, broke below support of its 200-day MA yesterday. As previously discussed, we remain short a basket of home construction stocks within the sector.
Taking an updated look at the major indices, you will see that extensive technical damage has been caused by the selloff of the past two days. Most notably, yesterday’s action caused the S&P 500 to close below support of its 200-day moving average for the first time since May 13 of this year. It also resulted in a break below support of the August low, as illustrated by the horizontal dotted line on the chart below:
Similarly, the Dow Jones Industrial Average also closed below support of its prior low from August, which it tested and initially bounced off of on September 22. The Dow was already trading below its 200-day MA, but is now well below it:
The Nasdaq Composite, which was showing relative strength until yesterday, closed just a few points above the prior intraday low from September 22, although it did break it on a closing price basis. The Nasdaq still remains 26 points above its 200-day MA, the only one of the “big 3” broad market indices still above it. Relative strength in a few of the tech sectors have been helping the Nasdaq, so caution is required if shorting QQQQ. Other broad market ETFs such as SPY, DIA, MDY, or IWM are probably safer bets on the short side. IWM, in particular, is very close to breaking a big shelf of horizontal price support, so we intend to remain short in anticipation of such.
It’s becoming quite obvious that the numerous sectors and indices we pointed out and illustrated in the October 4 issue of The Wagner Daily have resumed their downtrends after testing resistance of their downtrend lines earlier in the week. Hopefully you have been following our broad market and sector analysis of the past several days and are profiting on the short side of the market. When most of the major indices and industry sectors rallied into resistance of their daily downtrend lines over the past week, it presented low-risk opportunities for selling short. Kudos to those who saw the short setups and took advantage of them without hesitation.
If you are already short, there is no reason to take your profits here, regardless of how tempting it may be. Instead, simply trail your stops lower using a basic indicator such as the hourly downtrend lines or the 20-MA on the hourly charts. If, however, you are not yet positioned on the short side of the market, realize there is a higher degree of risk to initiate new positions here without waiting for at least a bounce into short-term resistance or, at the very least, a few days of sideways consolidation near the lows. If you’re still net long, be extremely careful regardless of which sector you are in. If showing losses, be sure to honor your stops and don’t rationalize a reason why you should disregard them. Taking small losses when you’re wrong is more important than knowing how to pick winning stocks and ETFs. Above all, remember to trade what you see, not what you think!
There are no new plays for today, but we will e-mail an intraday alert if/when we enter a new position.
Daily Performance Report:
Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:
Open positions (coming into today):
GLD long (600 shares remaining from Sept. 7 and 9 entries; sold 200 on Sept. 22) –
bought 44.59 (avg.), stop 46.08, target new high (trailing a stop), unrealized points = + 1.77, unrealized P/L = + $1,071
IWM short (500 shares from Oct. 4 entry) –
shorted 66.43, stop 66.15, target half at 63.20 & half at 61.10, unrealized points = + 2.33, unrealized P/L = + $1,165
Closed positions (since last report):
FXI long (400 shares from Oct. 3 entry) –
bought 64.61, sold 62.76, points = (1.85), net P/L = ($748)
Current equity exposure ($100,000 max. buying power):
Due to strong downside momentum, we have increased the profit target in IWM short. As per above, we will cover half of the position at the initial target of 63.20, but will hold the second half with a target of 61.10. Note the stop has been tightened as well. FXI stopped out yesterday.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and