Stocks attempted to follow through on the previous day’s gains yesterday morning, but extensive overhead resistance caused the major indices to reverse at mid-day and close with losses. The Nasdaq Composite, up 0.8% at its intraday high, finished 0.5% lower. The small-cap Russell 2000 and mid-cap S&P 400 indices followed a similar pattern, as both indices saw their earlier 0.7% gains evaporate and change to 0.4% losses. Relative strength in the blue chips enabled the Dow Jones Industrials to retain a 0.2% gain, but the S&P 500 lost 0.2%. All the major indices except the Dow closed at their intraday lows, hinting at potential weakness into today’s open.
Turnover rose across the board yesterday, indicating another day of institutional selling. Total volume in the Nasdaq increased by 5%, while volume in the NYSE was 4% higher than the previous day’s level. The losses on higher volume caused the Nasdaq to register its fifth “distribution day” within the past four weeks. For the S&P, it was the sixth such day of institutional selling within the same period. Although the Dow closed marginally higher, its intraday action was bearish and marked by selling into strength. When the S&P had its fifth “distribution day” on February 7, it should have served as a major warning sign to the bulls. However, many traders and investors ignored the importance of institutional volume patterns and bought stocks on February 8. Institutions subsequently took advantage of that bounce and sold into strength yesterday afternoon, thereby causing the formation of another “distribution day.” Astute traders know the value of analyzing the broad market’s price and volume patterns on a daily basis, which is why we do it as well.
As you may recall, we viewed the February 8 rally as merely a bounce into resistance that provided a short-selling opportunity as opposed to a time to buy stocks. We illustrated how the 20-day moving averages had perfectly converged with the 61.8% Fibonacci retracement levels in both the S&P and Nasdaq, the combination of which we anticipated would provide major resistance. With textbook accuracy, those levels perfectly marked yesterday’s highs and triggered the mid-day reversals in both the S&P and Nasdaq. The hourly charts of both the S&P and Nasdaq below illustrate this:
The good thing about yesterday’s action is that it makes it easy to define our new short-term resistance levels in the broad market. Simply put, yesterday’s highs in each of the major indices should not be violated now. If they are, then caution on the short side is necessary. A break above yesterday’s highs would represent a recovery back above the 20 and 50-day MAs in both the S&P and Nasdaq, which could gather upside momentum due to short covering. But as long as we stay below those highs, our bias remains firmly on the short side. Further, both the small and mid-cap indices are now poised to break support of their uptrend lines as well.
As for support levels, the next major area of support for both the S&P and Nasdaq is their December lows. On the S&P 500, that low is around the 1,245 level. On the Nasdaq, the 2,200 level is a major area of support. As we approach those levels, we will look to tighten stops on all remaining broad market short positions.
Due to continued relative weakness in the mid-cap stocks, we simultaneously covered our short position in SPY (S&P 500) and shorted MDY (S&P 400 Index) yesterday afternoon instead. So far, this is working well because MDY subsequently dropped 0.2% more than SPY into yesterday’s close. Assuming the overall broad market weakness continues, we expect small and mid-cap stocks to lead the way lower, just as they led the market higher for so many months. We also remain short both OIH (Oil Service HOLDR) and XLU (Utilities SPDR), the former of which is now showing nearly a 9-point marked to market gain and nearing our profit target.
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 = + 8.65unrealized P/L = + $865
MDY short (400 shares from Feb. 9 entry) –
shorted 141.15, stop 142.70, target 136.30, unrealized points = + 1.35, unrealized P/L = + $540
XLU short (700 shares from Feb. 2 entry) –
shorted 32.03, stop 32.59, target 30.15, unrealized points = + 0.27, unrealized P/L = + $189
Closed positions (since last report):
SPY short (400 shares from Feb. 3 entry) –
shorted 126.58, covered 127.25, points = (0.67), net P/L = ($276)
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we simultaneously covered SPY and shorted MDY yesterday. As discussed in yesterday’s Wagner Daily, MDY has begun to show more relative weakness than SPY; hence the reason for the swap.
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