Commentary:

Stocks attempted to rally after the S&P 500 bounced off its 200-day moving average for the third time, but the morning gains quickly dissolved as the bears took control in the afternoon. The S&P 500, which was trading 0.7% higher in the morning, finished with a 0.6% loss, as did both the Dow Jones Industrial Average and small-cap Russell 2000 indices. The Nasdaq Composite saw its intraday gain of 1% morph into a 0.5% closing loss. The S&P Midcap 400 Index fell 0.8%. Each of the major indices finished not only at their intraday lows, but at the lows of the prior day as well.

Turnover declined in yesterday’s session, enabling the S&P and Nasdaq to dodge another “distribution day,” but market internals were negative nevertheless. Total volume in the NYSE was 4% lighter than the previous day’s level, while volume in the Nasdaq declined by 8%. In both exchanges, declining volume exceeded advancing volume by just over 2 to 1.

Yesterday’s loss in the S&P 500 caused the index to close firmly below support of its 200-day moving average for the first time since October of 2005:

On May 23, the S&P closed fractionally below its 200-MA, but not by a wide enough margin to confirm a break of support. But this time, the break of the 200-MA is also confirmed by three failed rally attempts off of that support level. As we have been mentioned several times over the past week, the market action has the potential to get even more negative now that the S&P has broken its 200-MA. This is due largely to the fact that institutional sell programs often kick in when a major index falls below its 200-day moving average. If only one index was below its 200-day MA and the rest were strong, it would be less significant, but the problem is that all of the major indices are showing about the same amount of weakness and similar chart patterns. Notice how the small-cap Russell 2000 and the S&P Midcap 400 indices, both of which were leading the market before the selloff began, closed right at their 200-day MAs as well:

The Nasdaq Composite’s action on June 2 was a great example of how a prior support level becomes the new resistance level after the support is broken. Unlike the S&P, which broke its 200-day MA only yesterday, the Nasdaq has been trading below its 200-MA since May 17. Then, on June 2, the Nasdaq retracement off the lows perfectly stopped in its tracks due to resistance of the 200-MA. This shows how powerfully the 200-MA acts as a support/resistance level:

It doesn’t take a nuclear physicist to figure out that now is a dangerous time to be long the equities markets. This, of course, has been the case for several weeks, but the situation could really worsen if the Russell 200 and S&P Midcap 400 indices crack their 200-MAs as well. More importantly than the chart patterns of the major indices is that there is no individual stock or sector leadership in the markets. A weak market always requires one or two sectors to begin outperforming and lead the rest of the market higher, but we are not seeing any clear leadership yet. Former high flying stocks have begun to break key trendlines and new breakout attempts are failing all over the place. These factors alone confirm that the market is not healthy and it is wrong to be long.

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Today’s Watchlist:

There are no new setups for today, as we are at our maximum buying power based on the model account.

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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 = + 2.11, unrealized P/L = + $739

TLT long (320 shares from June 2 entry) –
bought 84.70, stop 83.08, target 89.45, unrealized points = + 0.40, unrealized P/L = + $128

FXE long (240 shares from June 2 entry) –
bought 129.22, stop 127.05, target new high (will trail stop), unrealized points = (1.20), unrealized P/L = ($288)

Closed positions (since last report):

none

Current equity exposure ($100,000 max. buying power):

$96,173

Notes:


No changes to stops or targets on the open positions.
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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
Head Trader