Stocks built upon the previous day’s losses yesterday, but support of its 200-day moving average enabled the S&P 500 to bounce off its intraday low. The S&P 500 fell only 0.1%, but the Dow Jones Industrial Average broke a key support level and lost 0.4%. The small-cap Russell 2000 Index also slid 0.4% and the Nasdaq Composite similarly declined 0.3%. The S&P Midcap 400 closed 0.6% lower. A modest recovery late in the afternoon helped reduce the market’s losses, but each of the major indices still finished near the middle of their intraday ranges.
Total volume in the NYSE increased by 16% yesterday, while volume in the Nasdaq was 18% higher than the previous day’s level. The broad-based losses on higher volume caused both the S&P and Nasdaq to register another bearish “distribution day,” the third of the past six sessions. As a close analysis of overall price and volume patterns always indicates what is truly happening “underneath the hood” of the market, the technical picture has certainly been negative. Since the selloff began nearly one month ago, there have been only two “accumulation days” of higher volume gains, but the broad market’s price gains on both of those days were minor. Conversely, approximately half of the “down” days have been on higher volume, clearly indicating institutional selling. Until volume begins to dry up on the “down” days and increases on meaningful “up” days, we must assume the current downtrend in the market remains firmly intact.
The most notable technical event that occurred yesterday was the Dow’s break of its prior low from last month. This is important because each of the other major indices are still holding above their May lows, albeit not by a wide margin. The Dow Jones was formerly outperforming both the S&P 500 and Nasdaq Composite in recent times, as the index was sitting within one percent of an all-time high before the selloff began. But now that the Dow fell to a new multi-month low ahead of the other indices yesterday, it is apparent that blue chip stocks are beginning to show the most relative weakness. The shift to weakness in the Dow initially became apparent when the index failed to keep pace with the broad market’s correction off its lows in the latter half of May, which is the reason we initiated our short position in the Dow Jones DIAMONDS (DIA). The dashed horizontal blue line on the chart of the Dow below marks prior support of the May low that was broken yesterday:
As you can see, the Dow is now within easy striking distance of its 200-day moving average. Like we mentioned yesterday, the break of its May low should now lead to a test of its 200-day MA in the coming days. We remain short the DIA position and will continue to trail a stop lower as the position moves to a larger gain.
Speaking of 200-day moving averages, the S&P 500 once again tested and bounced off support of its closely-watched 200-MA. Since its first test of the 200-MA support level last month, the S&P has attempted to rally off that level on several occasions. However, each rally attempt fizzled out quickly, which eventually caused the S&P to drop back down to its 200-MA for the third time yesterday. Because it is generally considered to be a good indicator of the long-term direction of a market, the 200-MA is always a powerful support or resistance level, but each subsequent bounce off the 200 weakens its support. Based on the lack of follow-through from previous retracements off the 200-MA, we are not confident that the S&P will hold above its 200-MA for much longer:
Our overall bias remains bearish in the intermediate-term, just as it has been for the past several weeks. The major indices have been trending steadily lower as opposed to chopping around in a sideways range, as they did in the months that preceded the May selloff. Until downtrend lines are broken, individual stock leadership returns, and the market’s volume patterns change, we must assume the trend will remain intact. As always, the easiest money is made by simply following the trend and not trying to be a hero by picking a market bottom. If you’re not comfortable selling short, it is probably best if you wait on the sidelines in cash, or perhaps buy a specialty ETF that is not correlated directly to the U.S. market’s direction. For this reason, we remain long both the iShares 20+ year T-bond Index (TLT) and the Euro Currency Trust (FXE), both of which are trading counter to the trend of the stock market. However, if you are not a short seller, you really should learn and become comfortable with doing so. The market’s correction could last longer than you might think, so be prepared to take advantage of the trend in the event that it develops into an actual bear market.
There are no new setups for today, as we are at our maximum buying power based on the model account.
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):
DIA short (350 shares from May 23 entry) –
sold short 111.30 (avg.), stop 113.65, target 106.30, unrealized points = + 1.31, unrealized P/L = + $458
TLT long (320 shares from June 2 entry) –
bought 84.70, stop 83.08, target 89.45, unrealized points = + 0.38, unrealized P/L = + $122
FXE long (240 shares from June 2 entry) –
bought 129.22, stop 127.05, target new high (will trail stop), unrealized points = (0.80), unrealized P/L = +($192)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
No changes to open positions.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and