Stocks attempted to kick off the week on a positive note by erasing some of last week’s losses, but the sellers won the choppy session by day’s end. After gapping lower on the open, the broad market briefly moved into the black several hour later, but an erratic tug-of-war between the bulls and bears led to indecision in the afternoon. A wave of selling during the final hour eventually caused the major indices to close at their intraday lows. Like the previous day, small and mid-cap stocks led the market lower. The Russell 2000 Index plummeted 2.0%, while the S&P Midcap 400 lost 1.8%. The Nasdaq Composite, up 0.4% at its morning high, finished 1.2% lower. The S&P 500 and Dow Jones Industrial Average were lower by 0.9% and 0.5% respectively.
Total volume in the NYSE was 7% higher than the previous day’s level, as volume in the Nasdaq tapered off by 3%. The loss on higher volume in the S&P (aka “distribution day”) indicates that institutional selling remains in effect, though the Nasdaq’s losses of the past two days have been on lighter volume. Still, market internals were rather bearish. Declining volume in the NYSE blew away advancing volume by a margin of 10 to 1. The Nasdaq ratio was negative by 9 to 2. When the market is in an uptrend, we maintain a rolling count of how many “distribution days” the S&P and Nasdaq sustain within a one-month period because doing so enables us to have an early warning of potential market tops. However, keeping track of “distribution days” serves less purpose when the market is already in a corrective mode. Instead, we’re on the lookout for signs of institutional accumulation that may signal at least a short-term bottom. This would occur if the S&P and/or Nasdaq make a solid advance on higher turnover.
Over the last five days, the Nasdaq Composite has tumbled 6.5%, the S&P 500 has swooned 5.2%, and the Dow Jones Industrial Average has fallen 4.6%. On a short-term basis, one could reasonably conclude that the market is “oversold” and is likely to bounce within the next several days. In case that happens today, let’s take a look at where the S&P and Nasdaq are likely to run into overhead resistance levels. With the major indices quite far away from resistance on their daily charts, we will drill down to the shorter-term hourly chart interval. Normally, we would simply look at resistance of the hourly trendlines, but the downtrends has been so strong that any small bounce in the market will cause a break of the current trendlines. Therefore, our most effective tool for predicting support and resistance levels in strong trends is the use of Fibonacci retracement lines. Below is a chart of the bellwether S&P 500 Index:
The hourly chart above includes the 20 and 40-period moving averages (respectively colored in brown and teal). Next, we drew Fibonacci retracement lines from the peak of February 22 down to yesterday’s low. When using Fibonacci to predict support and resistance levels, we usually focus on just the 38.2%, 50%, and 61.8% retracement levels. But if a stock or index is in an overly strong bullish or bearish trend, we also use the 23.6% level because strong trends may never even retrace to the 38.2% level. Currently, the S&P 500 is showing its 23.6% retracement level at 1,394, just above the 20-period moving average. Just a modest bounce in the stock market should at least enable the S&P to retrace to that area of resistance. If the index rallies to that level and consolidates for a few hours, it will probably make a run at its next line of resistance, the 38.2% retracement level of 1,407. Because the 40-period moving average on the hourly chart often enables trend resumptions, it may initially be difficult for the S&P to rally above convergence of the 38.2% Fibo retracement and the 40-period moving average. Next, take a look at the Nasdaq Composite:
Curiously, the 20 and 40-period moving averages on the hourly Nasdaq chart line up in the same places as they did with the S&P chart. The 20-MA is just above the 23.6% Fibonacci retracement level, while the 40-MA perfectly converges with the 38.2% retracement at 2,413. Pretty interesting, isn’t it? Both moving averages and Fibonacci retracements are useful tools for predicting how far a stock or index will correct, but those support or resistance levels become even more powerful when they converge with each other like the 40-MAs and 38.2% retracements have done.
Although the anticipated bounce may not come today, being prepared with a list of key resistance levels gives you a predetermined plan of where to sell any remaining long positions and/or initiate new short positions on stocks and ETFs that have broken below support of intermediate and long-term uptrend lines. When the upside correction finally occurs, it should not be difficult for the S&P and Nasdaq to at least rally to their 23.6% retracement levels. When/if they do so, carefully observe the broad market’s price action before aggressively entering new short positions. If the indexes hold and trade sideways near their 23.6% retracement levels for an hour or more, it is bullish and could lead to another leg up to the 38.2% retracements. If, however, the indices immediately reverse back down on the test of their 23.6% retracements, we could be looking at an extremely weak market that lacks the strength for even a small upside price correction. In this situation, a sideways consolidation at the lows for several days (“correction by time”) could take the place of a bounce (“correction by price”).
With all this talk of a bounce, let us remind you that “oversold” markets can continue to become even more “oversold” before eventually correcting. The same is true of strong markets that appear to be “overbought” in strong uptrends. Therefore, it’s dangerous to assume stocks will bounce from current levels just because the S&P has lost five percent in five days. Who’s to say the index cannot drop another one or two percent before bouncing? Nevertheless, caution is advised with new short positions, and you may want to tighten your stops to lock in gains on any shorts you’ve been riding lower since the selloff began. We remain long the UltraShort S&P 500 ProShares (SDS), which is showing an unrealized gain of 2.5 points since our March 1 entry. If necessary, we plan to hold it through a pullback on the way to our price target. Per yesterday’s commentary, we also sold short the Utilities HOLDR (UTH), but with reduced share size.
There are no new setups for today, as we are now waiting for the market to bounce before entering any new short positions. As for long positions, too short of a time horizon is currently required in order to swing trade that side of the market.
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 58.89, target 64.18, unrealized points = + 2.54, unrealized P/L = + $762
UTH short (100 shares from March 5 entry) – sold short 133.18, stop 137.59, target 125.10, unrealized points = + 0.97, unrealized P/L = + $97
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we sold short a small position of UTH yesterday afternoon. We also raised the stop on SDS long.
Edited by Deron Wagner,
MTG Founder and