Until the final ninety minutes of trading, the major indices were poised for a third consecutive day of consolidation, but a sharp sell-off into the close changed the technical picture. As it has done for many weeks, the Dow Jones Industrial Average showed relative strength by giving up only 0.4%, but the Nasdaq Composite fell 1.3%, its worst percentage loss since the 2.1% drop on March 13. The S&P 500 was lower by 0.8%. Not surprisingly, small and mid-cap stocks suffered the most. The Russell 2000 and S&P Midcap 400 indices declined 1.8% and 1.4% respectively. Yesterday, we illustrated how the Russell 2000 was lagging because it was the only major stock market index that had not yet broken out to a new high. As such, it was likely to fall the most when the rest of the broad market eventually pulled back as well. Stocks, ETFs, and Indexes with with relative weakness rally the least on the broad market’s “up” days, and fall the most on “down” days. Conversely, those with relative strength outperform the S&P on “up” days, but also lose the least on “down” days. Despite their ugly finish, the major indices still scored strong gains in the month of April. Both the S&P 500 and Nasdaq Composite rallied 4.3%, while the Dow scored a quite impressive gain of 5.7%.
Throughout most of the session, turnover was running firmly below the previous day’s level, but institutional selling caused volume to spike sharply during the late afternoon sell-off. Total volume in the Nasdaq finished just 4% above than the previous day’s mark, but it was tracking 15% lighter before the sell-off began around 2:15 pm ET. Volume in the NYSE was 14% higher by day’s end. The broad-based losses on higher volume caused both the S&P and Nasdaq to register bearish “distribution days.” It was the fourth such day for the Nasdaq within the past four weeks, but only the second for the S&P and Dow. Rarely can a healthy uptrend sustain more than four days of institutional selling within a rolling four-week period, so be cautious in the Nasdaq. The volume patterns in the S&P and Dow, however, have been stronger. Even though the Dow has had two “distribution days” within the past month, it has had only 3 losing days within the past 22 sessions! Nasty market internals confirmed yesterday’s broad-based weakness. Declining volume in the NYSE exceeded advancing volume by a margin of 4 to 1. The Nasdaq ratio was negative by 5 to 1. All the major industry sectors we follow closed in the red as well.
Taking an updated look at the daily charts, the most notable event in the broad market was that the Nasdaq Composite dropped below its prior high from February 22. The index broke out to a new six-year high on March 25, but it only remained in that territory for three days before falling back below the breakout level. Although an inability to retain a new high is bearish, it’s positive that the index still remains above support of its primary uptrend line from the March low. On the chart below, the ascending blue dashed line marks support of the intermediate-term uptrend, while the horizontal red dashed line shows resistance of the prior high. Notice how the 20-day exponential moving average also lies just below support of the uptrend line:
Less technical damage was done in the S&P and Dow, as both indices remain comfortably above their prior highs. Further, neither index is yet in danger of breaking below their primary uptrend lines. As you can see, the 20-day EMAs have also risen to provide support in the vicinity of the intermediate-term uptrend lines:
On the surface, yesterday’s action was pretty bearish. However, a decent correction is what the stock market needs in order to provide us with fresh buy setups with good risk/reward ratios. In yesterday’s newsletter, we specifically mentioned that we were looking for corrections in the major indices down to their 20-day exponential moving averages before buying new positions. Looking at the charts above, one could reasonably assume this might occur sooner rather than later. The convergence of the primary uptrend lines within the vicinity of the 20-day EMAs should provide further support. But rather than rushing to buy the first touch of the uptrend lines and 20-day EMAs, we will first assess the volume patterns over the next few days.
The appearance of more “distribution days” could signal that institutions are rushing for the exit doors. In such a scenario, the stock market will most likely enter an intermediate-term correction, rather than merely a short-term retracement to the uptrend lines and 20-day EMAs. On the other hand, it would be bullish if stocks gradually slide down to support on declining volume from current levels. We would then look for new long entries in strong ETFs as they rise above their short-term hourly downtrend lines. As for selling short, it remains risky as long as the S&P, Nasdaq, and Dow are each above their uptrend lines and 20-day EMAs. We’re pleased that we have been flat since the middle of last week, as yesterday’s weakness would have stopped us out of any late-stage long entries. Some of the best traders we know are out of the markets more than they are in the markets. The present seems to be one of those great times to be in cash, at least in the near-term.
There are no new setups in the pre-market today. Our patience to wait for a short-term market correction is paying off, as any new ETFs we bought last week would probably have stopped out yesterday. As per above, we are now waiting for the major indices to test support of their uptrend lines and 20-day EMAs. If they act well around those support levels, we will be looking to buy ETFs with relative strength over the next week. Until then, we remain comfortably in cash, awaiting the market’s next move.
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):
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
We are currently flat, awaiting the next clear opportunity to present itself.
Edited by Deron Wagner,
MTG Founder and