Commentary:
Following through on Monday’s weakness, stocks suffered a damaging round of broad-based losses yesterday. After gapping lower on the open, the major indices moved steadily lower throughout the morning, consolidated near their lows at mid-day, then plunged to new lows in the final hour of trading. The S&P 500, Nasdaq Composite, and S&P Midcap 400 indexes each plummeted 2.4%, while the Dow Jones Industrial Average fell 2.1%. The small-cap Russell 2000 lost 2.7%, maintaining its recent relative weakness. All of the main stock market indexes closed at their dead intraday lows.
Higher turnover accompanied yesterday’s sell-off, but overall volume levels remained below average. Total volume in the NYSE rose 26% above the previous day’s level, as volume in the Nasdaq similarly increased by 24%. The losses on higher volume caused both the S&P and Nasdaq to register a bearish “distribution day.” But because Monday’s turnover was so light, total volume in both exchanges still failed to exceed their respective 50-day average levels. Again, trading activity will probably remain lighter than average until the Labor Day holiday has passed.
Although turnover was lighter than average, market internals were simply atrocious. In the NYSE, declining volume trounced advancing volume by a whopping margin of 25 to 1! Specifically, the entire NYSE saw only 52.5 million shares of advancing volume and 1.34 billion shares of declining volume. This coincided with only 1 stock closing higher for every 7 that finished lower. The Nasdaq adv/dec volume ratio was better, but still firmly negative at just under 8 to 1.
Yesterday, we pointed out the strong breakouts in several of the Chinese ETFs and mentioned the possibility of buying them on a pullback to their breakout levels. However, yesterday’s broad market weakness caused them to not only retrace to their breakout levels, but to pierce far below them as well. Falling nearly 8% yesterday, both the iShares Xinhua China 25 (FXI) and the SPDR S&P China (GXC) gave back their previous day’s gains and then some. Now that both ETFs are in danger of failing their breakouts, all bets are off on the long side of the Chinese ETFs. This is not surprising because breakouts to new highs have a high rate of failure in weak markets. We warned of this in yesterday’s commentary by saying that, “Nevertheless, caution is still required on the long side of even FXI and GXC. Selling pressure will certainly affect these ETFs if the domestic market starts heading back down towards it prior lows.”
The two bearish positions we entered during last week’s bounce are starting to pay off. The UltraShort S&P 500 ProShares (SDS), which we bought on August 23, gapped back above its 200-day MA yesterday and is now showing an unrealized gain of nearly 2 points. Since the Dow has been holding up better than the S&P 500, our long position in the UltraShort Dow 30 ProShares (DXD) is not doing as well as SDS. Still, it is now showing a gain of 1 point. Now that the broad market has made a substantial move lower, we also raised the stops on SDS and DXD in order to take some risk out of the trades. Subscribers should note the detailed stop prices listed below. If volatility tightens up, we will continue to trail the stops tighter in order to lock in gains. We also remain long the iShares 20+ year Treasury Bond Fund (TLT), which moved further into the plus column yesterday.
In the August 27 issue of The Wagner Daily, we said of last week’s light volume rally that, “The problem with this scenario is that the entire week’s gains can be wiped out by just one instance of institutional selling.” That’s exactly what happened when volume increased yesterday. Each of the major indices gave back all of last week’s gains, and a bit more, within a single session. The S&P 500 broke below pivotal support of both its 200-day MA and prior downtrend line. The Nasdaq Composite did the same. Only the Dow remains above its 200-day MA, though one more day of selling would test its resolve.
The broad market’s short-term uptrend that began with the August 16 low is essentially dead. In addition to the current intermediate-term downtrends, each of the major indexes have now entered short-term downtrends as well. From here, the next major levels of support are the prior intraday lows that were set on August 16. Since that session was a reversal day in which the main market indexes closed near their intraday highs, it would only take a break of the August 15 lows to set new closing lows for the month. If any one of the major indexes breaks down to close below its August 16 low, it will likely have broken its primary long-term uptrend as well. As evidenced by yesterdays’ nasty market internals, overall odds clearly favor the short side of the market. At the very least, consider waiting in cash for the market’s next attempt at stabilization. A double bottom near the August 16 lows is one such bullish scenario that might occur in the near future.
Today’s Watchlist:
There are no new setups for today. Instead, we will focus on managing the three open positions.
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:
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Open positions (coming into today):
-
SDS long (250 shares from August 23 entry) – bought 55.85, stop 55.47, target 62.89, unrealized points + 1.8, unrealized P/L + $450
DXD long (250 shares total – half from Aug. 22, half from Aug. 23) – bought 52.07 (avg.), stop 50.87, target 57.90, unrealized points + 0.94, unrealized P/L + $235
TLT long (300 shares from August 24 entry) – bought 88.02, stop 86.61, target 90.89, unrealized points + 0.44, unrealized P/L + $132
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $54,203
Notes:
Now that the broad market has made a substantial move lower, we raised the stops on SDS and DXD. New stops are just below yesterday’s lows, which greatly reduces the capital risk in these positions. If volatility tightens up, we can raise the stops further, below the hourly uptrend lines.
Edited by Deron Wagner,
MTG Founder and
Head Trader