Following through on momentum from the previous day’s sell-off, both the S&P and Dow rung up substantial losses yesterday morning, but a relief rally in financial stocks enabled the indexes to recover into the close. The Nasdaq wasn’t as fortunate. Shaking off intraday losses of approximately 1.7%, the S&P 500 and Dow Jones Industrial Average lost only 0.1% and 0.3% respectively. Tech stocks took a beating, sending the Nasdaq Composite 1.9% lower. However, the Nasdaq was actually off by a devastating 3.9% at its mid-day low. Small and mid-cap stocks managed to close higher. The Russell 2000 gained 0.6%, while the S&P Midcap 400 advanced 0.4%. All the major indices except the Nasdaq finished in the upper third of their intraday ranges. The laggard Nasdaq closed just below the middle of its trading range.
Overall volume levels rocketed higher, pointing to the presence of heavy institutional selling. Turnover in the Nasdaq soared 40% above the previous day’s level. Total volume in the NYSE similarly increased by 36%. In both exchanges, trading was at its highest levels since mid-August. The Nasdaq suffered its second straight “distribution day.” Declining volume in the Nasdaq exceeded advancing volume by 4 to 1, but the NYSE ratio was in parity.
In yesterday’s commentary, we said that, “The tug-of-war we’ve been seeing between the bulls of the Nasdaq and the bears of the S&P and Dow may be nearing an end, with the bears taking the upper hand. Rarely can the major indices show strong price divergence for an extended period of time before they eventually get in sync with each other.” Yesterday’s large drop in the Nasdaq and modest losses in the S&P and Dow was merely a product of the Nasdaq now “catching up” to the relative weakness and bearishness in the chart patterns of the S&P and Dow. Unlike the S&P, the Nasdaq is still above its 200-day MA, but it has fallen below both its 50-day MA and October low. It may not be long before the chart pattern of the Nasdaq falls in line with the weakness of the S&P and Dow.
Also in yesterday’s Wagner Daily, we said of Wednesday’s price action in the S&P 500 that, “Yesterday’s close of 1,475 correlates to a 50% Fibonacci retracement from the August low to the October high. If that low is broken, the next major area of support should be found near the 61.8% Fibonacci retracement level of 1,449. If that area of support fails to hold, a retest of the August low could be expected.” It was therefore not surprising that the intraday low of yesterday’s session was 1,450, just one point above support of the 61.8% Fibonacci retracement. This is illustrated on the daily chart of the S&P 500 below:
Although the S&P 500 bounced off support of its 61.8% retracement from the August low to the October high, it remains below resistance of its 200-day MA. Going into today’s session, that area of 1,483, right at yesterday’s high, is a key level to watch. As long as the S&P remains below 1,483, we’re inclined to say that “long is wrong,” especially with the Nasdaq now confirming the prior weakness in the S&P and Dow. Support should obviously be found at yesterday’s low of 1,450. If the index falls below that level, a test of the August low could arrive sooner than one might expect.
Yesterday, we closed our long position in the inversely correlated UltraShort Russell 2000 ProShares (TWM) due to impending resistance of its prior highs from September. Though we had also trailed a stop to lock in gains along the way, we made a decision to sell TWM into strength of yesterday’s rally. Along with the resistance of its September high, we also noticed that small cap stocks had begun showing slight relative strength to the broad market. This was further confirmed by the positive close in the Russell 2000, but negative closes in the S&P, Dow, and Nasdaq. Our exit price of $71.74 is annotated on the daily chart of TWM below:
Netting a gain of 11% (6.9 points) on a holding period of just seven days, TWM was a very profitable ETF trade. Now that we have closed TWM, our only open position is a short sale in the iShares Mexico Index (EWW). With the Nasdaq confirming the weakness in the S&P, which is now trading below its 200-day MA, we see no good reason to be long the broad market. Don’t forget that the presence of numerous “distribution days” further adds to the overhead supply. Bounces will happen along the way down, but closing long positions and/or initiating new short positions into those retracements is the wisest plan of action. We will gladly change our bearish sentiment if the market gives us good reason to do so, but trading what we see, not what we think is the only way for professional traders to consistently realize profits.
There are no new setups in the pre-market today. As always, we will send an intraday e-mail alert if/when we enter anything not listed as a setup.
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):
EWW short (300 shares from November 7 entry) – sold short 57.95, stop 60.68, target 50.89, unrealized points + 1.31, unrealized P/L + $393
Closed positions (since last report):
TWM long (350 shares from November 1 entry) – bought 64.83, sold 71.74, points + 6.91, net P/L + $2,411
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we sold TWM into strength, netting a handsome gain of over $2,400 (nearly a 5% gain of the model portfolio value). No changes to the EWW position.
Edited by Deron Wagner,
MTG Founder and