Excitement from the Black Friday rally was quite short-lived, as traders returned from the holiday weekend and promptly sold into strength of the prior day’s gains. After moving higher for only the first thirty minutes, stocks swiftly reversed course. The bulls attempted to regain control at mid-day, but the reversal attempt fizzled out, sending the major indices to new intraday lows. By the closing bell, all of last Friday’s gains had evaporated. The S&P 500 tumbled 2.3%, the Nasdaq Composite 2.1%, and the Dow Jones Industrial Average 1.8%. The small-cap Russell 2000 and S&P Midcap 400 indices fell 2.6% and 1.6% respectively. All the main stock market indexes finished at their worst levels of the day and at fresh near-term lows. Intense selling in the final hour of trading indicated clear reluctance of institutions to hold long positions.
Naturally, turnover was much higher than in last Friday’s shortened session. Total volume in the NYSE rose 101%, while volume in the Nasdaq registered 157% greater than the previous day’s level. Comparing trading activity to recent full trading days, volume was its lightest level of the past week. Volume in the Nasdaq marginally exceeded its 50-day average, but NYSE turnover was lighter than average. Declining volume in the NYSE surpassed advancing volume by a margin of nearly 7 to 1. The Nasdaq ratio was negative by just under 5 to 1.
Not surprisingly, the biggest gaining ETFs yesterday were the new breed of exchange traded funds that are inversely correlated to the direction of various market indexes and industry sectors. This includes both the ProShares Short/UltraShort and the new Rydex Inverse family of ETFs. As the main indexes are breaking down, these ETFs are breaking out to new multi-month highs. With the indexes that have fallen very rapidly, the inverse ETFs have zoomed straight up with minimal price consolidation, making them risky to buy at current levels. One exception, however, is the ProShares UltraShort QQQ ETF (QID). As the Nasdaq 100 Index has been consolidating near its recent lows for the past several weeks, it has resulted in the formation of bullish price consolidation in the inversely correlated QID. Any further loss in the Nasdaq 100 will cause QID to breakout, triggering a decent buying opportunity in QID. This is annotated in the daily chart below:
As you can see, a move above yesterday’s high will represent a breakout above its two-week high. The November 12 high of $43.04 is technically the actual near-term high, but downward momentum in the Nasdaq should lead to a violation of its November 12 low if yesterday’s low is broken. In a case like this, one could “scale in” to the trade by buying partial share size on a breakout above yesterday’s high, then adding to the position on a rally above the November 12 high. A logical initial price target is resistance of the 200-day MA, around $45.65. To protect against a sudden bullish reversal in the Nasdaq, be sure to keep a protective sell stop not much below yesterday’s close. Management of the trade entry in this manner would provide a very positive risk/reward ratio. Note that buying QID before confirmation of an actual breakout above yesterday’s high is not advisable.
In yesterday’s commentary, we mentioned that one might expect the major indices to build on last Friday’s gains and attempt to rally towards resistance of their 20-day moving averages. Upside momentum indeed carried into the open, but it only lasted thirty minutes before the bears ruined the party. As with the large gains the major indices scored on November 13, the November 23 gains were correspondingly substantial. Unfortunately, however, the same pattern of selling into strength followed. It took four days for stocks to erase their November 13 gains, but the same thing was accomplished in just one session with the November 23 gains. Gapping up above the prior day’s highs, then closing below that day’s lows, each of the major indices formed bearish “engulfing” candlesticks on their daily charts. The market is making it plain to see that recovery attempts have little chance of holding for more than a day or two before the primary downtrends resume control.
When the main stock market indexes recently retraced more than two-thirds of the gains from their August lows to October highs, we said that they were likely to continue all the way down to at least test support of their August lows. The relatively weak Russell 2000 was the first to do so, trading down exactly to its August intraday low last week. Now, the other major indices are in the process of doing the same. Yesterday, the Dow Industrials finished 102 points below its August closing low of 12,845, while the S&P 500 closed just half a point above its August closing low of 1,406.70. The S&P Midcap 400 similarly settled less than 2 points above its August closing low of 819.97. The Nasdaq Composite fell back below its 200-day MA, but is still 3.6% above its August closing low of 2,451. To keep on top of these pivotal support levels, we suggest setting price alerts on your trading platform to instantly notify you of any violation of the August closing lows. Note, however, that the intraday lows from August 16, a bit further below, will also act as support.
If the persistent weakness in the market is giving you the blues, don’t fret. A sustainable bounce will eventually come. But in the meantime, don’t try to be a hero by blindly guessing a bottom without having any obvious signs of such. Such heroic and valiant attempts at “bottom fishing” are extremely risky and rarely rewarded in this business. Your main objective right now should be capital preservation. Sitting on the sidelines with a primarily cash position, protecting your hard-earned profits from the less challenging times, will enable you to quickly leap at the ideal buying opportunities when they arise again. As always, it’s of paramount importance to trade what you see, not what you think!
QID – ProShares UltraShort QQQ ETF
Shares = 400
Trigger = HALF above 42.63, HALF above 43.16 (see notes below)
Stop = 41.31 (below yesterday’s close)
Target = 45.58 (near the 200-day MA)
Dividend Date = December 24, 2007
Notes = See commentary above for complete explanation of this setup. Note that we plan to “scale in” to this position by buying 200 shares on the first trigger over yesterday’s high, then adding 200 more above the November 12 high.
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):
IDU long (300 shares from November 19 entry) – bought 101.09, stop 99.21, target new high (will trail stop), unrealized points (0.46), unrealized P/L ($138)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
No changes to our sole open position, which continues to show relative strength to the broad market.
Edited by Deron Wagner,
MTG Founder and