The Nasdaq Composite fell to a new low of 2006 yesterday, as another wave of institutional distribution resulted in extensive broad-based losses. Each of the major indices opened nearly flat, but subsequently trended steadily lower throughout the entire day. Small and mid-cap stocks, the two strongest market segments in the prior bull market, suffered the largest losses. The Russell 2000 Index plummeted 2.6% and the S&P Midcap 400 tumbled 2.2%, while the Nasdaq Composite trailed closely behind with a 2.1% loss. The S&P 500 slid 1.3% and the Dow Jones Industrial Average lost 0.9%. Each of the major indices finished at their intraday lows, which caused a lot of technical damage to the daily charts.
Total volume in the NYSE increased by 2%, while volume in the Nasdaq was 8% higher than the previous day’s level. The substantial losses on higher volume made yesterday another bearish “distribution day,” a rather common occurrence these days. With a majority of the market’s “down days” still occurring on higher volume, it is evident that mutual, hedge, and pension funds are still dumping shares into strength. Confirming this yesterday were extremely negative market internals. In both exchanges, declining volume exceeded advancing volume by an astronomical margin of approximately 10 to 1. When breadth is extremely negative, it usually leaves traders and investors nowhere to hide. This was certainly the case yesterday, as all but one of the major industry sectors we follow closed in the red. The DJ Utilities Average ($DJU) eked out a 0.1% gain.
In the June 9 issue of The Wagner Daily, we discussed how the previous day’s action had provided mixed signals as to the market’s near-term direction. The bullish argument was that the major indices sold off sharply in the morning, but reversed to finish near their intraday highs. Most importantly, total market volume that day surged to its highest level in years. On the other hand, the negative was that the S&P 500 still closed that session below its 200-day moving average. Over the course of the three preceding weeks, the S&P had attempted to bounce off support of its 200-MA on three separate occasions, but it finally failed to hold and closed below it on June 7. Despite the high volume reversal attempt of June 8, it was bearish that the S&P failed to recover back above its 200-day MA.
Going into yesterday’s session, we were on the lookout for potential upside follow-through from the June 8 reversal attempt. Despite moderate losses on June 9, the major indices had still retained enough of their gains off the June 8 intraday lows to garner more upside momentum. But institutions saw the June 8 reversal attempt as a chance to sell more shares into strength. If each of the major indices would have held above their June 8 lows yesterday, the reversal attempt would still be valid. However, the Nasdaq undercut the bottom of its June 8 range and finished at a new 7-month low:
Because the Nasdaq closed below its June 8 low, that day’s reversal attempt has technically been invalidated. This means the next bullish action that occurs would represent a new reversal attempt rather than a follow-through day. The reversal days provide us with a warning sign that the current trend may reverse, but it’s not until the subsequent follow-through day occurs that we actually consider reversing our positions. That’s why we warned against “jumping the gun” by going long yesterday, but also mentioned it was better to simply manage existing short positions rather than enter new ones after a reversal attempt.
So where does this leave us as we enter today’s session? For starters, all bets on the long side of the market are off. With the Nasdaq undercutting its June 8 low, there is simply no technical reason to be long the market here. If you’re short, you are most likely sitting on a nice profit regardless of the industry sector, so just continue to trail your stops. As we have mentioned in the past, very strong trending markets are ideal for trading the broad-based ETFs as opposed to the specific industry sectors because everything tends to move in sync.
We remain short a half position of the Dow Jones DIAMONDS (DIA), as we covered the first half of the position on June 8, near its intraday low. Presently, the DIA short is showing a marked to market gain of more than 3 points. Our long position in the Euro Currency Trust (FXE) stopped out yesterday. When we bought FXE on June 2, it was a nice breakout of a consolidation pattern, but the breakout promptly failed. As such, FXE gapped down below the low of its range and the long setup is no longer valid. Other than DIA, our only other open ETF position is the iShares 20+ year T-bond (TLT). Since our long entry on June 2, TLT has been moving steadily higher towards our price target.
There are no new setups in the pre-market today, but we will send an intraday e-mail alert if/when we enter anything new. For now, capital preservation should be your top priority.
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 (175 shares from May 23 entry) –
sold short 111.30 (avg.), stop 111.40, target 106.30, unrealized points = + 3.35, unrealized P/L = + $586
TLT long (320 shares from June 2 entry) –
bought 84.70, stop 83.85, target 89.45, unrealized points = + 1.09, unrealized P/L = + $349
Closed positions (since last report):
FXE long (240 shares from June 2 entry) –
bought 129.22, sold 125.97, points = (3.25), net P/L = ($785)
Current equity exposure ($100,000 max. buying power):
FXE stopped out yesterday after gapping down and violating the 20-minute low. However, both DIA and TLT moved deeper in the money. Note that the remaining shares of DIA are now nearing the original profit target.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and