After two failed attempts at recovering from the February 27 sell-off, stocks concluded the week with another session of ample losses last Friday. The major indices began with only a moderate opening gap down, but subsequently trended lower throughout the rest of the day. The Nasdaq Composite slid 1.5%, the S&P 500 1.1%, and the Dow Jones Industrial Average 1.0%. Just as they often show the most relative strength in strong markets, small and mid-cap stocks typically show relative weakness in weak markets. Last Friday was no exception, as the Russell 2000 plummeted 2.0% and the S&P Midcap 400 fell 1.5%. All of the major market indexes finished at both their intraday lows and their worst closing prices of the past several months. Weekly losses were just plain ugly. The Nasdaq Composite swooned 5.8%, the S&P 500 tumbled 4.4%,and the Dow Jones Industrial Average belly-flopped 4.2%.
Total volume in the NYSE declined by 16%, while volume in the Nasdaq was 8% lighter than the previous day’s level. It’s positive that volume receded slightly during Friday’s sell-off, but turnover in both exchanges remained firmly above 50-day average levels. This tells us that sellers remained firmly in control. Market internals were quite negative, but less extreme than we saw during the February 27 downtrend. Declining volume in the NYSE exceeded advancing volume by just under 8 to 1. The Nasdaq ratio was negative by nearly 5 to 1. Only 12% of the NYSE volume came from rising stocks, so winners were again few and far between.
Many sectors such as Financials, Pharmaceuticals, and Biotech have already fallen substantially in a very short period of time. If you’re already short these sectors, just keep trailing your stops lower to lock in profits along the way. But if you’re not already short, these sectors no longer present a positive risk/reward ratio for new trade entry because they could bounce significantly before making another leg down. One sector, however, that appears to be setting up for further losses is the DJ Utilities Average ($DJU). To illustrate this, take a look at the daily chart of the Utilities HOLDR (UTH), which has a very similar chart pattern to the $DJU itself:
Driven by news that energy giant TXU Corp. was going to be acquired, UTH gapped up sharply on February 26. However, even though it gained 3.0% that day, notice how it closed near the bottom of its intraday range. When it did, a bearish “inverted hammer” candlestick was formed. The following day, the entire market got slaughtered, causing UTH to immediately close the previous day’s bullish gap. Though the February 27 weakness sped things along a bit, the pattern itself was bearish because the “inverted hammer” formed at the top of its uptrend. UTH bounced a bit on March 1, but gave back the gain on March 2. It eventually closed the week right at support of its 20-day MA, but in a precarious position. If we see any further weakness in the broad market over the next few days, UTH will most likely break support of last week’s low and its 20-day MA. If it does, downward momentum should cause it to break below its 50-day MA, as many other sectors have already done. A realistic downside price target would be convergence of the January lows with the 200-day moving average, somewhere in the neighborhood of $125. A conservative protective stop could be placed just above the new hourly downtrend line, while a looser protective stop could be above the 61.8% Fibonacci retracement of the recent sell-off. As an alternative to UTH, you might also consider the similar S&P Select Utilities SPDR (XLU).
With practically every industry sector correcting sharply last week, it was initially frivolous to discuss which sectors were showing the most weakness. That’s why we instead focused on support and resistance levels on charts of the broad-based ETFs that track the major indices. But the market will likely bounce sometime in the coming week, so it is advantageous to know which sectors are demonstrating the most relative weakness bounce and setting up with the weakest chart patterns. By selling short only the weakest sectors with a good risk/reward, you can both minimize risk and maximize profits. Short positions of stocks and indexes with relative weakness to the broad market carry the least risk because they will rise a lesser percentage when the major market indexes bounce. Conversely, if an equity is so weak that it fails to rally with the broad market, what do you think happens to that position when the market resumes its downtrend? It will be the first one to fall, and its percentage loss will typically be greater than that of the major indices. This is why we sell short ETFs and stocks with relative weakness in downtrend, while buying those with relative strength in uptrends. It’s a basic, yet highly profitable strategy.
As for ETFs on our long watchlist, we haven’t mentioned any because the market has not yet given us any reason to consider buying stocks and ETFs. Not only have losses in the major indices been nasty, but market internals have been as well. With the overly negative breadth readings we have been seeing, the probability of any stock or ETF staying positive for more than a few hours is very slim. Nevertheless, we’re keeping an eye on sectors that may offer the best upside potential when the market eventually finds support, but it’s of little value to discuss those when stocks have not yet given any signs of a bottom. Capital preservation needs to remain your top priority right now!
We’re stalking UTH for a potential short entry, but the overnight futures market is presently gapping down too much in order to list an entry price in the pre-market. Instead, we’ll assess market conditions on the open, then send an intraday e-mail alert if we still decide to sell short UTH (or anything else).
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):
SDS long (300 shares from March 1 entry) – bought 60.38, stop 58.12, target 64.18, unrealized points = + 1.30, unrealized P/L = + $390
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
No changes to our open position.
Edited by Deron Wagner,
MTG Founder and