Stocks again tumbled lower last Friday, capping an ugly week on a negative note, but volume backed off from the prior day’s incredibly brisk levels. The major indices chopped around for most of the day, but sell programs in the final thirty minutes of trading caused the broad market to fall sharply. Both the S&P 500 and Dow Jones Industrial Average lost 1.6%, while the Nasdaq Composite slid 1.4%. The small-cap Russell 2000 skidded another 1.7%, racking up nearly a 9% loss in just six sessions. The S&P Midcap 400 was off by 1.3%. All the major stock market indexes closed at their dead lows of the week.
Compared to the week’s other losing days, the one bright spot of Friday was the lower turnover across the board. Total volume in the NYSE eased 28%, as volume in the Nasdaq came in 21% lighter than the previous day’s level. With Thursday’s distribution volume reaching near record levels, it was a bit of a relief that turnover receded substantially. Nevertheless, market internals remained quite negative. In both exchanges, declining volume exceeded advancing volume by a ratio of just over 4 to 1.
On the daily charts, the S&P 500, Dow Jones, and Nasdaq Composite have all blown through support of their 50-day moving averages and formed “lower lows.” As such, now is a good time to look at the longer-term weekly charts in order to determine where stocks are likely to find their next major levels of support. We’ll begin by analyzing the weekly chart of the benchmark S&P 500:
The good news is that the S&P 500 is approaching confluence of its prior highs from February 2007 and the lower channel support of its weekly uptrend line that began with the lows of July 2006. Although not shown on the weekly chart, major support of the 200-day moving average is also in the same vicinity (1,448). As this multiple convergence of support is just a few points below last week’s close, we won’t have to wait long to find out how the broad-based index reacts to this test of key support.
For the Dow, the prior highs from February and the lower channel of the one-year uptrend line also converge. However, since the Dow showed more relative strength than the S&P 500 on the way up, it also has further to fall before running into this level. The Dow also looks better than the S&P because it is still holding above an area of horizontal price support from its June 2007 lows, marked by the blue horizontal line on the chart below:
The weekly chart of the Nasdaq Composite is interesting because the prior lows from May and June 2007, the prior highs from February 2007, and the lower channel of the one-year uptrend line all converge in the same area, just below last week’s close. There’s a very good chance the Nasdaq puts in a substantial bounce at this level. But if it doesn’t, the stock market may really be in trouble. We’ve circled this area of triple convergence below:
This week, we are likely to see two conflicting forces at work. First, the value investors who perceive the market to be at “bargain” levels are likely to step in on the first sign of market stabilization. Though this may initially provide a bit of price support, last week’s poor action will have undoubtedly triggered a wave of redemptions in mutual and pension funds from investors who have been playing it tight. In order to meet clients’ demands, institutions will be forced to liquidate equities into strength. Be prepared for high volatility and indecision as the end result. Don’t try to be a hero by calling the market bottom. Instead, let stocks settle and provide a few clear signs that the bears have relinquished control before jumping back in on the long side of the market.
Odds now clearly favor the short side in the intermediate-term, but we could easily see a decent relief rally before moving much lower in the short-term. When the bounce eventually comes, we’ll be looking for low-risk entry points to sell short the ETFs that showed the most relative weakness on the way down. At best, we anticipate at least several more weeks before the technical damage of last week is erased. A more realistic expectation, however, is one to two months. As always, we’ll keep you informed of any major signs that could reverse the bearish sentiment. Professional traders know there are key times when the best position is cash. Right now is one of those times. Patience to wait for proper setups pays huge dividends in the end.
There are no new setups in the pre-market today. After locking in gains on our open positions, we have been flat for the past two days. As per above, we’ll be looking for new short setups when the market eventually bounces, but the risk/reward of entering new short positions at current levels is not very good. As for the long side, we still like SMH for a short-term momentum play of 1 to 3 days if it trades above Friday’s high. However, we first need to be a little comfortable with broad market conditions before getting anything long. Due to its relative strength, PBW long remains on our watchlist too. We will send an intraday e-mail alert if/when we enter any new positions. Until then, let’s be patient and enjoy the risk-free joy of being flat.
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.
Edited by Deron Wagner,
MTG Founder and