The major indices rallied throughout the first half of yesterday’s session, but the bears took control in the afternoon and caused the broad market to sustain another day of higher volume selling. Both the S&P 500 and Nasdaq Composite fell 0.4%, while the Dow Jones Indusrial Average lost 0.3%. The smallcap Russell 2000 and midcap S&P 400 both showed relative weakness and lost 0.8% and 0.5% respectively. Computer software and hardware were among the few sectors that showed strength, as most sectors on our watchlist posted losses. Each of the broad-based indices also closed at their intraday lows, which often leads to pressure in the following morning’s session.
Both the S&P 500 and Nasdaq registered their second consecutive “distribution days,” as volume increased in both exchanges yesterday. Total volume in the Nasdaq increased by 15%, while volume in the NYSE came in 5% higher than the previous day’s level. Declining volume exceeded advancing volume by a margin of nearly 2 to 1 in both exchanges.
Stocks rallied sharply as a knee-jerk reaction to the new Fed chief announcement on October 24, but it appears that institutions have since used that strength as a selling opportunity. Although the major indices have not dropped a significant percentage over the past two days, the fact that they have declined on higher volume both times is indicative of institutional selling “under the hood.” If you ignore the volume changes of the past two days, it simply appears that the broad market has dropped a little bit. But astute traders who understand the relationship between price and volume will see the action of the past two days as a warning sign to the bulls. You may recall that a series of “distribution days” preceded the decline in the first half of October as well.
Looking at the daily charts of the S&P 500 and Nasdaq, it quickly becomes apparent why both indices have seen selling pressure the past several days. The S&P rallied into resistance of its 200-day moving average on October 24, but has been unable to close above it. Yesterday’s action was bearish because the index traded well above the 200-MA on an intraday basis, but finished the day well below it. As you may know, the 200-day moving average often acts like a brick wall with regard to providing support or resistance. This is because the level is closely watched by institutions as an indicator of the long-term direction of an index. The daily chart of the S&P below illustrates how the index has tried but failed to close above its 200-day MA. Also take note of the wide day to day indecision throughout the past two weeks — the reason we have recently been avoiding the broad-based ETFs:
The Nasdaq Composite has been trading above its 200-day moving average for the past week, but it reversed lower after rallying into resistance of its 50-day moving average yesterday:
The combination of the Nasdaq at its 50-day MA and the S&P at its 200-day MA has provided a perfect excuse for traders to sell into strength. As such, we feel now is the time to once again begin testing the waters on the short side of the markets. Despite the large percentage gains from the rallies of October 19 and 24, it is important to be cognizant of the “big picture.” Each of the major indices remain clearly in technical downtrends from their highs of either August or September. Furthermore, there has been only one day of higher volume buying (“accumulation day”) since the October lows, but there have been numerous days of distribution. The start of earnings season has certainly resulted in wild volatility from day to day, but the overall downtrend remains intact and odds still favor the short-side of the broad market.
Because SPY (S&P 500) is below its 20, 50, and 200-day moving averages, it has less support and more overhead resistance than an ETF such as QQQQ (Nasdaq 100), which is currently above all three of those MAs. DIA (Dow Jones) also has a lot more overhead supply than QQQQ, but be aware that the Dow has been extremely volatile over the past week. Overall, ETFs with the most relative weakness to the broad market present the best shorting opportunities. Upon determining which ETFs you wish to short, consider using the hourly charts to determine your short entry points. Regular subscribers will see that we are targeting SPY for a potential short entry today because it broke support of its hourly uptrend line into yesterday’s close. We also continue to stalk GLD for potential long entry.
SPY – S&P 500 Index SPDR
Trigger = below 119.08 (below yesterday’s low)
Target = 114.10 (just above support of April low)
Stop = 120.80 (above yesterday’s high)
Shares = 400
Notes = Per commentary above, we are looking for a short entry in SPY below yesterday’s low.
GLD – StreetTRACKS Gold Trust
Trigger = above 47.25 (above yesterday’s high)
Target = new high (will trail a stop)
Stop = 46.25 (below the 20-day MA)
Shares = 600
Notes = This setup from yesterday did not yet trigger, but we still like it for potential entry today. See the October 26 issue of The Wagner Daily for commentary on this setup. Also, note that GLD gaps a lot due to overnight changes in the price of spot gold futures. As such, always use the MTG Opening Gap Rules to manage the entry and stop prices.
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):
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
We are currently flat.
here for glossary and explanation of terms used in The Wagner Daily
Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and