Support of the Nasdaq Composite’s 200-day MA helped stocks enjoy a relief rally yesterday, enabling the major indices to recover a decent portion of their recent losses. The broad market gapped sharply higher on the open, traded in a tight, sideways range throughout the morning, then made another leg up in the afternoon. The Nasdaq zoomed 3.5% higher, reducing its total loss of the preceding four days to “just” 5.4%. Both the S&P 500 and small-cap Russell 2000 indexes gained 2.9%, the Dow Jones Industrial Average 2.5%, and the S&P Midcap 400 2.2%. All of the main stock market indexes closed at their intraday highs for a change.
On the surface, yesterday’s large gains might give the impression that the worst is over and a bottom has been formed. But one big problem with that notion is that the advance occurred on lighter volume than Monday’s sell-off. Total volume in the both the NYSE and Nasdaq limped in 5% lower than the prior day’s level. Legitimate bullish reversal days are typically accompanied by higher turnover, indicating institutional demand for stocks has returned. Unfortunately for the bulls, mutual funds, hedge funds, and other institutions that drive the stock market lacked a healthy appetite for accumulation yesterday.
Throughout yesterday’s session, we closely observed several factors of the market’s price action, trying to determine just how much strength was truly “under the hood.” Aside from the lower broad market volume mentioned earlier, there was another big problem. The largest gains in the market were merely in stocks that have been beaten senseless over the past week. If institutions were jumping back in the market, we would expect to see bullish breakouts in the few remaining stocks that were consolidating at their highs. Instead, those leading tickers such as UTHR, ONXX, and MBT barely budged. Sure, Apple (AAPL) gained 10% yesterday, but it had also failed its breakout to a new high and plunged 20% over the preceding four days. The biggest gainers yesterday were similar situations as Apple. Overall, this tells us that yesterday’s rally was largely driven by short covering and “bargain hunting” by individual retail investors. We feel it was not the work of market-moving institutions who instead would have been accumulating the strongest stocks, triggering breakouts to new 52-week highs.
In yesterday morning’s Wagner Daily, we said of the Nasdaq Composite that, “Though the index may attempt to breach the 200-day MA on an intraday basis, this major support level should provide an impetus for some sort of relief rally.” The breach never came, but the relief rally certainly did. It’s positive that the Nasdaq bounced off its 200-day MA, but the S&P 500 now has the opposite problem. Yesterday’s gains caused the index to close right below new resistance of its 200-day MA:
Remember the most basic tenet of technical analysis states that a prior level of support becomes the new level of resistance, after the support is broken. Therefore, not only will the 200-day MA now provide resistance, but the prior lows of October will as well (see the dotted horizontal line). Going into today’s session, pay attention to the price and volume action of the S&P 500 as it approaches and likely tests its 200-day MA overhead. Similarly, the Nasdaq will need to contend with resistance of its 50-day MA (at 2,718) if it retraces much further.
On Monday, we bought the India Index (INP) when it pulled back to support of its primary uptrend line. Although we originally planned to hold it longer, we made a judgment call to quickly lock in a gain of 3.5 points shortly after the opening gap. We felt there was too much overhead supply for INP to go much higher without consolidating for at least a few days (or much longer). Patiently waiting through the consolidation normally would not be a problem, but the U.S. markets still have not proven they’ve found a short-term bottom. A resumption of weakness in the U.S. could weight on INP enough to quickly send it back to our entry point. Because it was a long position in a weak market, we took the easier route by locking in the quick gain. Nevertheless, INP remains on our watchlist for potential re-entry, somewhat depending on overall market conditions.
In addition to closing INP, we also entered a new short position in the S&P Metals and Mining SPDR (XME) into yesterday’s bounce. As previously discussed, we like the bearish pattern setting up in that sector and viewed yesterday’s rally as a good short-selling opportunity. Additional low-risk entry points for short selling should begin to present themselves as the market attempts to recover in the coming days. For now, the odds clearly favor short selling the weak sectors into the market’s bounce, as opposed to buying into strength. Those who took advantage of our idea to momentum trade the long side of the crushed Financial and Retail sectors made a bit of cash yesterday, but continue playing it very tight and quick on the long side of the market, if at all. Keep yesterday’s rally in perspective of the market’s recent losses, in order to prevent getting sucked in by the euphoria of the crowd.
There are no new setups in the pre-market today, but intraday e-mail alerts will be sent if/when we enter anything new. Due to the current period of high volatility, we’re finding it safer to make intraday decisions for trade entries, rather than listing them here in the pre-market. On our radar right now are potential short entries in any of the broad-based ETFs that rally into convergence of key resistance levels.
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):
DUG long (250 shares from November 12 entry) – bought 42.43 (avg.), stop 40.88, target 50.30, unrealized points + 0.36, unrealized P/L + $90
XME short (300 shares from November 13 entry) – sold short 62.60, stop 64.82, target 56.20, unrealized points (0.39), unrealized P/L ($117)
Closed positions (since last report):
INP long (150 shares from November 12 entry) – bought 80.75, sold 84.22, points + 3.47, net P/L + $518
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we sold INP into strength of yesterday’s gap. We also entered a short position in XME into the gap up.
Edited by Deron Wagner,
MTG Founder and