A strong earnings report from networking leader Cisco Systems (CSCO) enabled the Nasdaq to snap its four-day losing streak and helped the S&P 500 to recover its previous day’s losses. Both the Nasdaq Composite and Dow Jones Industrial Average advanced 1%, while the S&P 500 rallied 0.9%. The small-cap Russell 2000 and mid-cap S&P 400 again showed relative weakness, gaining only 0.6% and 0.3% respectively. For the first time in more than a week, stocks showed strength into the final hour of trading, causing each of the major indices to finish at their intraday highs.
Turnover was nearly the same as the prior day’s levels in both exchanges. In the Nasdaq, total volume increased by 1%, but volume was 1% lower in the NYSE. While yesterday’s broad market gains were positive, it would have been more bullish if volume had also increased across the board. Technically, the one percent increase in turnover gave the Nasdaq a bullish “accumulation day” yesterday, but the S&P did not confirm. More importantly, don’t forget that the Nasdaq has still had four days of institutional selling within the past four weeks, while the S&P has had five such “distribution days.”
Just as steadily uptrending markets typically have pullbacks along the way, weak markets always bounce within the course of their downtrends. On a technical level, nothing really significant occurred with yesterday’s action that would cause us to change our short and intermediate-term bearish bias. The Nasdaq Composite managed to close back above its 50-day moving average, but only by one point. Furthermore, the index only bounced to the 38.2% Fibonacci retracement level from its Feb. 1 high down to its Feb. 7 low. We have illustrated this on the hourly chart of the Nasdaq below:
Unless the Nasdaq closes above the 61.8% Fibo retracement (the red line at the 2,284 level), we must assume the short-term bias favors the downside. Also be aware that overhead resistance of the 20-day MA converges with the 61.8% Fibonacci retracement, which adds further resistance.
Unlike the Nasdaq, the S&P 500 still closed below its 50-day moving average. But like the Nasdaq, the S&P also finished at the 38.2% Fibonacci retracement level of its short-term downtrend (from the Jan. 30 high down to the Feb. 7 low). Curiously, the S&P’s 20-day moving average also converges with the 61.8% Fibo retracement level, just like it does on the Nasdaq. If the S&P bounces high enough, 1,274 is that convergence point that should provide strong resistance.
Yesterday’s gains enabled the S&P 500 to fully recover all of its February 7 loss, while both the Nasdaq Composite and Dow Jones Industrials also recovered their losses and then some. However, it is notable that both the Russell 2000 and S&P 400 indices lagged behind this time, recovering only about one-third of their prior day’s losses. This is interesting because, until recently, both the Russell and S&P 400 had been showing relative strength to the other indices. Because these two indices were former market leaders, their sudden relative weakness over the last several days is not a good sign for the broad market. As we discussed yesterday, strong markets need leadership somewhere, but former market leading sectors such as Oil and Gold have started to get whacked. Now it appears that small and mid-caps are poised to do the same. Semiconductors have held up well the past several days, but the index is still in a trading range. If sector leadership remains absent, the market will have nothing to support itself.
We remain short OIH, SPY, and XLU. Both OIH and XLU are looking fine, as they showed relative weakness yesterday by closing nearly flat. SPY closed within a few pennies of our original entry point, but should be fine as long as it stays below its 20-day moving average. However, because of the new relative weakness in the small and mid-cap stocks, we may cover SPY and short MDY (S&P 400) or IWM (Russell 2000) instead. As always, we will send an intraday e-mail alert to subscribers if we do.
There are no new setups for today, as the model account is near its maximum equity exposure. Instead, we will focus on managing the three open positions closely.
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):
OIH short (100 shares from Feb. 3 entry) –
shorted 150.10, stop 152.20, target 137.80, unrealized points = + 4.62unrealized P/L = + $462
XLU short (700 shares from Feb. 2 entry) –
shorted 32.03, stop 32.59, target 30.15, unrealized points = + 0.38, unrealized P/L = + $266
SPY short (400 shares from Feb. 3 entry) –
shorted 126.58, stop 127.55, target 122.60, unrealized points = (0.04), unrealized P/L = ($16)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Per the commentary above, we may close the SPY position and short IWM or MDY instead, as they are both showing more relative weakness now. An intraday alert will be e-mailed to you if that happens.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and