Tuesday’s breakdown to new lows in the major indices led to another session of substantial broad-based losses yesterday. Stocks attempted to rally twice during the day, but massive sell programs hit the markets during the final two hours. The Nasdaq Composite fell 1.6%, the S&P 500 1.4%, and the Dow Jones Industrial Average 1.3%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 1.5% and 2.1% respectively. Like the previous day, all of the primary stock market indexes closed at their intraday lows, as well as new multi-month lows.
Turnover swelled across the board, causing both the S&P and Nasdaq to suffer another “distribution day.” Institutional selling triggered a 10% volume increase in the NYSE, while total volume in the Nasdaq came in 15% above the previous day’s level. Higher volume losses have become the norm lately. Market internals were firmly bearish, but not extreme enough to suggest capitulation and the forming of a bottom. In the NYSE, declining volume exceeded advancing volume by a margin of 7 to 1. The Nasdaq ratio was negative by nearly 5 to 1.
The Nasdaq Composite broke well below its 200-day moving average yesterday, leaving the Dow Industrials as the only major index still trading above this long-term trend indicator. When we bought the UltraShort Dow 30 ProShares (DXD) on August 9, our original price target equated to the Dow testing support of its 200-day MA. In the final minutes of yesterday’s session, DXD hit our price target, triggering our sell order and locking in a gain of nearly 5 points on the remaining shares. Since we sold half of the DXD position for a gain of 2.3 points the previous day, our average gain on the full position was 3.47 points (approximately 7%). Our remaining shares of the Short Russell 2000 ProShares (RWM) closed just 50 cents shy of our price target. We will be taking profits on RWM into today’s opening gap down. The Oil Service HOLDR (OIH), which we sold short on August 14, fell nearly 5 points yesterday and is already showing a substantial gain. Though the stock market’s correction is causing pain for long-term investors who only buy and hold, the rapid downtrend has yielded opportunities for short-term traders who participate on both sides of the market’s trend.
Yesterday, we said that, “Frankly, we don’t see anything on the long side of the market that looks appealing. Even if the market bounced today, we have not come across any ETFs we would be comfortable buying. This tells us that our best play now is to wait for the next decent upward retracement in the market, then initiate new short positions on the ETFs with the most relative weakness.” As you might have guessed, our sentiment remains the same going into today. There clearly is no reason to buy stocks or ETFs right now, unless you are a rapid-fire daytrader. Eventually, the market will give signals that it is trying to find a bottom, causing new buying opportunities to present themselves. But until that happens, it’s quite dangerous to blindly pick a bottom in the hopes of being a hero. Conversely, it’s also risky to enter new short positions at current levels. On a near-term basis, stocks could easily put in a substantial bounce.
In the pre-market S&P and Nasdaq futures are pointing to a large opening gap down today. We will be taking profits and covering our remaining short positions into the opening weakness. Then, we will remain flat and happy, watching from the sidelines until the market starts to retrace a bit of its losses. As recently shown on our annotated weekly charts, the S&P 500 will soon be nearing key support of its March low (the 1,387 area). Both the Nasdaq and Dow are still well above their March lows, but the 200-day moving averages now loom as overhead resistance.
There are no new trade setups for today.
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):
RWM long (150 shares remaining from August 8 entry) – bought 69.57, stop 70.38 , target 74.90 (see note below), unrealized points + 4.84, unrealized P/L + $726
OIH short (100 shares from August 14 entry) – sold short 169.10, stop 174.82 , target 156.80 (see note below), unrealized points + 4.23, unrealized P/L + $423
Closed positions (since last report):
DXD long (125 shares remaining from August 9 entry) – bought 50.04, sold 54.71, points + 4.67, net P/L + $581
Current equity exposure ($100,000 max. buying power):
We will be locking in profits by covering the remaining shares of RWM, as well as the full position of OIH, into today’s opening gap down. We will send an intraday e-mail alert shortly after the open.
DXD hit our original price target in the final few minutes of trading, triggering our sell order and locking in nearly a 5 point gain on the remaining shares. Gain on the full position was $862 (3.47 points average).
Edited by Deron Wagner,
MTG Founder and