Stocks valiantly attempted to recover some of their recent losses yesterday morning, but in true bear market fashion, sellers firmly took control into the close. Just as stocks often begin the day weak and finish strong in bull markets, the opposite intraday price action is common in bear markets. The Nasdaq Composite tumbled 2.4%, suffering its eighth consecutive day of losses. The S&P 500 turned an early 1% gain into a 1.8% closing loss. The Dow Jones Industrial Average similarly fell 1.9%. The small-cap Russell 2000 declined 2.6% to another fresh 52-week low, while the S&P Midcap 400 shed 2.3%. As with most days so far this year, all the major indices settled at their dead lows.
Volume continued to expand across the board, as mutual funds, hedge funds, pensions, and other institutions remained interested only in heading for the exit doors. Total volume in the NYSE increased 10% over the previous day’s level. The Nasdaq saw just 3% more shares change hands. In both exchanges, declining volume exceeded advancing volume by a margin of 4 to 1. Market internals were indicative of steady selling, but not by an extreme margin that would hint at overdone “panic selling.”
Yesterday, we pointed out the bullish setup in the iPath India Index (INP). Specifically, we noted that it was poised to resume its primary long-term uptrend after a one-month correction off the high. As anticipated, INP gapped above its intermediate-term downtrend line in the morning, triggering our long entry. Not surprisingly, however, it reversed sharply lower with the rest of the stock market in the afternoon. We took a shot at buying INP after it traded through our trigger price in the morning, but we trailed our stop to break-even shortly thereafter. Fortunately, this allowed us to scratch the trade when INP reversed a few hours later. Though the setup in INP would have probably followed through nicely in a strong market, the late-day failure was a good example of how difficult it is to profit on the long side of the market right now. Rallies in even the strongest of ETFs and stocks are extremely short-lived. Since we trailed the INP stop to breakeven right after entry, there was no harm done. However, this shows how one must be extremely proactive with micromanaging any long entries in this newly formed bear market.
In the January 7, 2008 issue of The Wagner Daily, we illustrated that the previous day’s weakness pushed the Nasdaq below key support of its November 2007 low, but the S&P and Dow were still holding. Unfortunately for the bulls, this did not remain the situation for very long. After just a feeble one-day bounce, both the S&P and Dow sliced through their November lows as well. A retest of the August 2007 lows in each of the major indices is now virtually assured. The Dow finished at a 9-month closing low yesterday, and is only 0.6% above its intraday low from August. This is illustrated below:
Remember that the November low in the Dow also represented the “neckline” of its weekly “head and shoulders” chart pattern. After the “right shoulder” formed in December, the breakdown below the November low in January also correlated to follow-through in the “head and shoulders” pattern. Both the S&P 500 and Nasdaq formed weekly “head and shoulders” patterns as well, then broke their necklines when they fell below their November lows within the past week. On a technical level, this is one of the reasons why downside momentum has been so fierce recently. We normally would have initiated short sales during the formation of the “right shoulders,” but that correlated with the light-volume holiday period, a tricky time to be trading in general.
Trying to blindly pick a bottom at current levels, without any technical sign of the market having found support, makes absolutely no sense. One could reasonably argue the stock market is “oversold” right now, but remember that “oversold” markets can, and often do, become even more “oversold” before seeing relief. Since the Nasdaq has already posted eight straight days of losses, who’s to say the losing streak can’t extend a few more days? Conversely, attempting to profit from new short sale entries after stocks have already taken such a beating could quickly find one scrambling to cover positions when the inevitable “short squeeze” comes along.
Obviously, the broad market will eventually find support and put in a tradeable bounce on the long side for short-term traders. Such a countertrend retracement will simultaneously provide ideal short sale entry points on ETFs and stocks that are now in firmly established downtrends. But until that happens, there just isn’t much to do. As long-term subscribers to this newsletter already know, our track record of consistent trade profitability over the years is the result of being aggressive when market conditions are ideal, and laying low when risk is too high. If you’re a novice trader or new subscriber to this newsletter, please realize that capital preservation, not high profits, should be your primary goal right now. A patient trader is a profitable one.
There are no new setups for today in the pre-market. However, we will send an intraday e-mail alert with trade details if we come across any short-term bounce plays. Subscribers not comfortable with very short-term trading should consider passing on any long entries we make, as they require proactive management. Instead, wait for ETF short sales into resistance we intend to make thereafter.
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):
Closed positions (since last report):
INP long (100 shares from January 8 entry) – bought 99.80, sold 99.64, points = (0.16), net P/L = ($18)
Current equity exposure ($100,000 max. buying power):
INP triggered yesterday morning, as per the MTG Opening Gap Rules. However, we proactively tightened the stop to breakeven, which was hit later in the session. We are now flat again.
Edited by Deron Wagner,
MTG Founder and