Commentary:
The major indices closed mixed yesterday as the broad market attempted to put the brakes on this month’s downward slide. As anticipated, the Semiconductor Index ($SOX) bounced off support of its 200-day moving average and pulled the Nasdaq into positive territory along with it. The 2.3% gain in the $SOX helped the Nasdaq Composite to close 0.5% higher. Both the S&P 500 and Dow Jones Industrials lagged behind and closed less than 0.1% lower. Midcap stocks of the S&P 400 Index continued to show relative weakness, as the index fell another 0.4%. The smallcap Russell 2000 Index, however, shook off early weakness and gained 0.3%. Unlike most days this month, the major indices closed near their intraday highs.
Although the Nasdaq turned in a decent gain yesterday, the rally was not confirmed by higher volume. Total volume in the Nasdaq declined by 11% yesterday, while turnover in the NYSE was 4% lower than the previous day’s level. Given the abundance of “distribution days” we have seen this month, it would have been more positive if the first reversal attempt occurred on higher volume. Yesterday’s drop in volume indicates the bears were taking a rest, but the bulls certainly did not rush on to the scenes. Market internals were mixed overall. In the NYSE, declining volume marginally exceeded advancing volume, but it was the opposite scenario in the Nasdaq.
If the broad market attempts to recover next week, it may have a difficult time making much headway because a lot of overhead supply has been created and extensive technical damage has been done over the past several weeks. Looking at the S&P 500, major resistance will be found at the 1,196 to 1,200 level. Both the short-term 10-day moving average and the long-term 200-day MA will provide resistance in that vicinity. Additionally, the 1,200 level corresponds to a 50% Fibonacci retracement level from the October high down to yesterday’s low. We have highlighted the area of resistance on the chart of the S&P below:
Because of all the resistance near the 1,200 level, we feel any rally into that area will provide a low-risk opportunity to short SPY. The corresponding area of resistance on SPY is 119.70 to 120.00 range, so you may wish to set an alert in case SPY rallies to that level. However, just as likely of a scenario is that the S&P (and SPY) will trade sideways and consolidate at the lows instead. Such action would indicate a correction by time, rather than a correction by price. If this occurs, we would be prepared to short a break to new lows, below the range of consolidation. We are prepared for either scenario.
Due to strength in the $SOX and the probability of a recovery attempt, we covered the remaining shares of our MDY short position into yesterday morning’s weakness, netting a gain of 3.47 points. We now have no open positions, but locked in substantial profits on several ETFs we closed this week. Based on our analysis, being flat seems like a good idea right now. After getting slammed throughout the first half of the month, the broad market is now due for at least a short-term recovery attempt. As such, this is not an ideal time to initiate new short positions. Conversely, buying the broad market in anticipation of a substantial bounce is equally risky because market internals remain overly bearish. Therefore, the best plan over the next several days is to wait patiently in cash and see how the market behaves.
Novice traders rarely have the discipline to be fully in cash, but professionals realize that cash is often the most profitable position. Remember that consistently profitable traders are out of the markets more than they are in the markets. If you had a good run on the short side over the past two weeks, don’t be greedy. Odds are good that you will have a chance to re-enter your short positions at better prices and with less risk next week. And if you happened to miss the whole downside move, this is certainly not the time to be chasing the market lower. Patience and discipline to sometimes do nothing are essential elements of a professional trader mindset.
Today’s Watchlist:
We have a few new short setups in mind, but we need to see an upside correction or at least consolidation in the broad market before entering them. See commentary above for more on this. As always, we will send an intraday e-mail alert if/when we enter any new trades today. If not already short, being in cash is your best bet.
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):
-
(none)
Closed positions (since last report):
-
MDY short (200 shares from Oct. 10 entry) –
shorted 125.78, covered 122.31, points = + 3.47, net P/L = + $690
Current equity exposure ($100,000 max. buying power):
- $0
Notes:
Per intraday e-mail alert, we covered the remaining MDY short position into the morning weakness. We are now flat.
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Edited by Deron Wagner,
MTG Founder and
Head Trader