Stocks began last Friday’s session in positive territory, but a selloff that began at mid-day caused the major indices to close lower across the board. Once again, tech and mid-cap stocks showed the most relative weakness, which is not a good sign for the markets. The mid-cap S&P 400 Index shed 0.5%, while the Nasdaq Composite fell 0.4%. The S&P 500 lost 0.3%, the small-cap Russell 2000 0.2%, and the Dow Jones Industrials 0.1%. Each of the major indices closed near their intraday lows, indicating a lack of institutional demand. For the week, the broad market turned in mixed results. The S&P 500 gained 0.5%, but the Nasdaq Composite lost 0.2%. The Russell 2000 fared the worst of the bunch, dropping 0.8% for the week.
Total volume in both exchanges surged higher last Friday, adding another “distribution day” for both the S&P and Nasdaq. Total volume in the NYSE was 28% higher, while volume in the Nasdaq increased substantially by 33% over the previous day’s level. To be fair, part of the increase in volume was likely attributed to the quarterly “quadruple witching” of options expiration on Friday. Nevertheless, the losses on higher volume caused the broad market to register its fifth day of institutional selling within the past four weeks. A healthy market can typically absorb two or three “distribution days” within a four-week period, but a fifth day of distribution within that time period is definitely an important warning sign to the bulls. Remember that volume tells us what is really happening “under the hood” of the markets. Daily analysis of the relationship between price and volume is also important because volume typically leads price, thereby giving us an early advantage at spotting potential trend reversals in the broad market. Without even looking at any charts, the recent pattern of “distribution days” alone should give the bulls cause for a pause.
Looking at the broad market, we feel that caution is required on the long side right now. In addition to the recent trend of “distribution days,” a few of the major indices are beginning to lose support of their consolidations on the daily charts. The small-cap Russell 2000 Index, typically a leading indicator of broad market direction, has already broken support of its daily uptrend line. It also closed below its 20-day moving average for the first time since October 28, the same week the current rally began. Below is a chart of IWM, the iShares ETF that closely mirrors the Russell 2000:
The longer-term weekly chart of IWM also shows that the index never broke out to a new 52-week high when the S&P and Nasdaq both did. IWM is trading back below its prior high from August 3, which confirms the relative weakness we have been discussing:
As you know, prior support becomes the new resistance after the support is broken, so we now expect the prior uptrend line (the red ascending line on the first chart) to provide resistance on any rally attempt. There has not been enough confirmation to cause us to be aggressively bearish on the overall market yet, but we feel IWM could lead the way lower if and when stocks begin to see more selling from here. Regular subscribers will notice we are stalking IWM for a potential short entry if it trades through our trigger price in the coming week.
Like the Russell 2000, the mid-cap S&P 400 Index also closed last Friday below its 20-day MA for the first time since October. Below is a chart of MDY, the ETF that mirrors the S&P 400:
Although a few of the indices are beginning to show weakness on their daily charts, bear in mind that both the S&P and Nasdaq are holding near their respective multi-year highs. Because both indices lack overhead supply, it would require only minimal buying pressure to push them to new highs from here. If that happens, the Russell 2000 and S&P 400 would probably go along with them. This means the major indices are presenting mixed signals right now and the most likely outcome is choppy trading conditions until the market resolves itself one way or the other. As such, it is not a good time to be aggressively entering new positions from here. If, however, you do take on new positions, be sure to reduce your position size because the markets are likely to become more erratic as we near the Christmas and New Year holidays.
IWM – Small-cap Russell 2000 Index
Trigger = below 67.59 (below Dec. 15 low)
Target = 64.25 (just above 200-day MA)
Stop = 68.90 (above yesterday’s high)
Shares = 300
Notes = This setup did not trigger last Friday, but we still like it for potential entry this week. For now, we are using the same trigger, stop, and target prices, but will send an intraday e-mail alert if anything changes. As per above, note that we are only looking to short IWM below the December 15 low. Notice also that we have reduced our overall risk exposure by trading smaller share size than usual due to low volume holiday season. If your broker does not have shares of IWM available for shorting, you may need to call and ask them to “locate” shares for you. Most brokers can do this, but consider changing brokers if they can not. See the commentary above for more information about this setup.
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):
PPH long (400 shares from Dec. 14 entry) –
bought 68.22, new stop 15 cents below 20-minute low (see notes below), target (see notes below), unrealized points = + 0.83, unrealized P/L = + $332
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Due to some positive news for Pfizer over the weekend, it appears that PPH will gap up to open near our target price today. However, because of the strong upward momentum that could follow, we are removing our target price and will trail a stop instead. Our new stop will be 15 cents below the low of the first 20 minutes. This will enable us to maximize gains in the event that PPH gaps open strongly and rallies further.
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