Stocks concluded the week with broad-based losses last Friday, but a late afternoon rally substantially reduced the damage. The major indices trended lower throughout the morning, attempted to recover at mid-day, but failed and dropped to new intraday lows early in the afternoon. Though such action usually leads to a weak close, the bulls took control in the final hour of trading, sending the broad market back to near the mid-day highs. At its worst level, the Nasdaq Composite was off by 1.6%, but the index finished only 0.8% lower. The S&P 500 narrowed a 1% intraday loss to only 0.3%. The Dow Jones Industrial Average lost only 0.2%, but the small-cap Russell 2000 fell 0.6%. Curiously, the S&P Midcap 400 was unchanged. All the indices except the Nasdaq Composite finished in the upper half of their intraday ranges. The Nasdaq showed relative weakness by finishing just below the middle of its range.
Turnover declined across the board, enabling the stock market to dodge the bearish “distribution day” that would have occurred if the major indices had registered losses on higher volume. Total volume in the NYSE was sharply lower and came in 24% below the previous day’s level. In the Nasdaq, volume declined by only 5%. While it’s positive that volume was lighter, it’s important to note that volume actually dried up as stocks rallied in the final hour. Prior to the closing rally, volume in the NYSE was on pace to be only 2% below the previous day’s level. Volume in the Nasdaq was actually 6% higher. This tells us the intraday selling pressure was significantly greater than the end-of-day buying program. Many traders prefer to close short positions ahead of weekends, so it’s not uncommon to see such action on otherwise weak Friday afternoons. Market internals were negative throughout the entire day, recovering only modestly into the close. In the Nasdaq, declining volume exceeded advancing volume by a margin of nearly 4 to 1. The NYSE showed a better performance “under the hood,” as its ratio was negatively by only 3 to 2.
We took the profit on our long position in the streetTRACKS Gold Trust (GLD), as it moved very close to our original price target last Friday morning, but then reversed lower intraday. We began buying GLD when it began forming the right shoulder of an inverse “head and shoulders” pattern on October 25. We subsequently added to the winning position on October 30 and November 8, eventually giving us an average price of 59.84. We sold the full position last Friday at 64.20, locking in a gain of 4.36 points (7.2%) above our average price. Gold still looks strong, but it is likely to consolidate or retrace a bit before moving much higher. The same goes for the oil and oil service stocks, which is the reason we sold our Oil Service HOLDR (OIH) position into strength on November 30.
Going into today, we are focused on resistance of the November 30 highs in each of the major indices. Many stocks have entered into short-term downtrends that began with the broad-based November 27 selloff. The major indices attempted to recover from the selloff from November 28 to 30, but each index formed a “lower high” before selling off again on December 1. Therefore, the November 30 intraday highs are technically significant because a rally above those levels would invalidate the mini-downtrends that have begun to form. Resistance of the November 30 highs is circled on the charts of the S&P, Dow, and Nasdaq below. You may want to make note of these levels and set price alerts on your trading platform:
As long as the S&P, Nasdaq, and Dow remain below their November 30 highs, overall odds favor the downside of the market, at least in the near-term. Note the operative word is “near-term” because all the major indices are above their 50-day moving averages. It is risky to attempt intermediate to long-term short positions without the major indices confirming their trend reversal by falling below their 50-day MAs. Obviously, all short selling bets are off, even in the near-term, if the major indices begin breaking out above their November 30 highs.
Assuming stocks remains below the November 30 highs, we will continue to gradually increase our exposure on the short side of the market. Throughout last week, we mentioned that Banking ($BKX) and Retail ($RLX) are two sectors that were poised to roll over to the downside. Based on Friday’s action, this still seems to be the case. Overhead resistance of the 20 and 50-day moving averages is becoming more significant in the $BKX, as the sector is barely clinging to support of its prior low from November 3. If the broad market weakness continues, Banking should be one of the sectors to lead the way lower. This is the reason we recently sold short the Regional Bank HOLDR (RKH), which has a very similar daily chart pattern to the $BKX index. One thing that really caught our eye about RKH last Friday was its huge volume. As illustrated below, RKH traded nearly 5 times its average daily volume:
Because ETFs are synthetic instruments, high volume will never have a direct bearing on the direction of its price. Only changes in the prices of the underlying stocks will affect the price of the ETF. Nevertheless, a volume spike in an ETF is a sign that an institution(s) made a big bet about its direction. Based on Friday’s negative price action, we view that volume spike as distribution, not accumulation.
In addition to RKH, we remain short the Dow Jones Industrial Average, but via the UltraShort Dow 30 ProShares (DXD) instead of the more popular DIAMONDS (DIA). Again, DXD is actually a long position that is inversely correlated to the price of the Dow, and at a 2 to 1 ratio. If the Dow drops 1%, DXD will move approximately 2% higher. The new ProShares ETFs are really a great way to participate on the short side of the stock market in an IRA or other qualified retirement account which cannot be margined for short selling.
Finally, the Retail Index ($RLX) tested support of its 50-day MA several times last week, but it should not require much more selling pressure to cause the index to break below it:
If the $RLX index breaks down, we will probably sell short one of the Retail ETFs and alert our subscribers via intraday e-mail alert. The Retail ETFs we are stalking for potential short sale are: IYC, RTH, PMR, and XRT. On the long side, Utilities ($DJU) are one of the only sectors ignoring the recent weakness in the broad market. The $DJU has closed at a fresh all-time high in each of the past three sessions, so buying this sector on a pullback is one of the less risky plays on the long side.
There are no new trade setups in the pre-market, but we are stalking the Retail ETFs for potential short sale. If the $RLX index breaks down, we will send an intraday e-mail alert if we enter any of the corresponding ETFs.
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):
DXD long (400 shares from Nov. 27 entry) –
bought 59.40, stop 59.09, target 61.80, unrealized points = + 0.54, unrealized P/L = + $216
RKH short (200 shares from Nov. 30 and Dec. 1 entries) –
sold short 155.21 (avg.), stop 157.68, target 150.80, unrealized points = (0.03), unrealized P/L = ($6)
Closed positions (since last report):
GLD long (300 shares total – 200 from Oct. 25 & 30 entries, 100 added on Nov. 8) –
bought 59.84 (avg.), sold 64.20, points = + 4.36, net P/L = + $1,302
PBW long (350 shares from Nov. 15 entry) –
bought 18.11, sold 17.75, points = (0.36), net P/L = ($133)
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we raised the stop in GLD to 64.21, which was subsequently hit later in the day. We closed it just below our original price target. PBW also hit its trailing stop, locking in a small loss. The second half of the RKH short position triggered and the new average price is reflected above.
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Edited by Deron Wagner,
MTG Founder and