The S&P 500’s inability to rally above its 1,295 resistance level finally caused the bulls to run for shelter yesterday, while the downside momentum attracted the bears as well. The Nasdaq Composite fell 1.1%, the S&P 500 1.0%, and the Dow Jones Industrial Average 0.9%. Small and mid-cap stocks equally felt the pain, as the Russell 2000 lost 1.4% and the S&P Midcap 400 dropped 1.1%. The broad market’s losses fully came in the first two hours of trading, at which point stocks subsequently consolidated in a narrow, choppy range near their lows. Each of the major indices finished near their intraday lows as well.
For the first time in seven days, turnover in both exchanges rose above average levels. Total volume in the NYSE increased by 23%, while volume in the Nasdaq spiked 24% higher than the previous day’s level. The substantial losses on firmly higher volume made yesterday a clear “distribution day.” Overly bearish market internals confirmed the return of institutional selling activity as well. In the NYSE, declining volume exceeded advancing volume by a whopping ratio of nearly 5 to 1! The ratio in the Nasdaq was negative by “only” 5 to 2.
Although we stopped out of our MDY short position only the day before, we promptly shorted SPY when it broke support of its hourly uptrend line yesterday morning. When you stop out of a trade, you cannot be afraid to re-enter the same or a similar trade the very next day if the setup still remains valid. As discussed yesterday, we anticipated that stocks would fall rapidly if the S&P did not break out above resistance of its prior high within the next day or two. Apparently, we didn’t have to even wait that long. Each failed attempt to breakout above the 1,295 resistance level weakened the resolve of the bulls until the overall level of supply finally surpassed demand. The resulting imbalance attracted more short sellers who, in turn, accelerated the decline.
Even though we have only seen a one-day decline, we feel that yesterday’s action caused significant psychological damage to the sentiment of traders and investors. Not only did the S&P sell off sharply at a key resistance level, but the Nasdaq Composite fell back below resistance of its prior downtrend line after trading above it for only one day. Looking forward, it will be important to see how the major indices hold up as they test support of their 20 and 50-day moving averages over the next several days. On the S&P 500, support of the 20-day MA is at 1,276, only four points below yesterday’s close, while the 50-day MA rests at 1,274. On the Nasdaq, support of the 20-MA is at 2,275 and the 50-MA is at 2,271. We have circled support of these moving averages on the charts of the S&P and Nasdaq below:
Being that the major indices are still above their major moving averages, it is certainly too early to declare a new downtrend has begun. However, we don’t see much reason to be long (at least in the short-term) unless the major indices were to suddenly rally back above their February 27 highs. If you are still long, be sure to honor your original protective stops without further analysis. This is not the time to be in “hope” mode, hoping that your stocks will come back to the price you bought them.
There are no new setups for today, as we are near our maximum buying power of the model account with the new SPY short position.
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):
SPY short (600 shares from Feb. 27 entry) –
shorted 129.04 (avg.), stop 130.35, target 125.70, unrealized points = + 0.81, unrealized P/L = + $486
Closed positions (since last report):
FXI long (200 shares remaining from Feb. 21 entry) –
bought 73.15, sold 73.21, points = + 0.06, net P/L = + $8
IYH long (500 shares from Feb. 27 entry) –
bought 65.20, sold 64.59, points = (0.61), net P/L = ($315)
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alerts, we covered IYH at market and added to the SPY short position intraday. FXI hit our trailing stop for a scratch.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and