A half-point rate cut by the Fed yesterday afternoon initially got the bulls quite excited, but the knee-jerk reaction faded just as quickly. Both the S&P 500 and Nasdaq Composite had surged to a 1.6% gain one hour after the 2:15 pm announcement on economic policy. When the closing bell rang forty-five minutes later, the S&P and Nasdaq finished lower by 0.5% and 0.4% respectively. The Dow Jones Industrial Average fell more than 200 points from its intraday peak, settling 0.3% lower. Small and mid-cap stocks fared worse. The Russell 2000 slid 1.4%, as the S&P Midcap 400 lost 1.1%. All the main stock market indexes closed near their intraday lows.
Turnover in the NYSE rose 15% above the previous day’s level, while trading in the Nasdaq ticked 19% higher. Higher volume on Fed days is typical because traders and investors often jump back in the market immediately following key afternoon announcements. It was negative, however, that the higher volume levels were accompanied by losses across the board. In both the NYSE and Nasdaq, declining volume exceeded declining volume by approximately 2 to 1. While that’s not an overly bad margin, realize the adv/dec volume ratio was actually positive by more than 3 to 1 less than an hour earlier.
If you’ve been paying attention to our analysis of the broad market over the past several days, yesterday afternoon’s action should not have been surprising. We’ve been expecting a swift move above last week’s highs, followed by immediate selling into strength and failure of the breakout attempt. That’s exactly what happened in the S&P and Dow yesterday afternoon. The Nasdaq was a bit too weak to make it above last week’s high. The intraday probe above last week’s high is shown on the daily chart of the S&P 500 below. Notice also how the 20-day exponential moving average provided additional resistance:
As you might recall, this is precisely the price action we were waiting for before initiating new short positions in anticipation of a resumption of the primary downtrends. The “inverted hammer” candlestick patterns formed by the major indices yesterday presents us with ideal short entry points below yesterday’s lows. Protective stops can be relatively tightly placed above yesterday’s intraday highs. While the S&P 500 formed a bearish “inverted hammer” at the top of its recent bounce off the lows, the inversely correlated UltraShort S&P 500 ProShares (SDS) conversely formed a bullish “hammer” candlestick at the bottom of its recent pullback off the high. Take a look:
If the chart pattern of SDS was that of any individual stock, the intraday shakeout below support of the 20-day EMA, but closing price above it, would be quite bullish. It’s also bullish that SDS bounced off new support of its prior high (annotated by the dashed horizontal line). As you can see below, the UltraShort Dow 30 ProShares (DXD) formed a similar pattern as well:
If both SDS and DXD are poised to resume their primary uptrends from here, that obviously means the overall stock market may be positioned to resume its primary downtrend. As such, regular subscribers should note our specific trigger, stop, and target prices for potential long entry into SDS, detailed below. Still, we certainly do not expect new short entries to be like shooting fish in a barrel. Stocks remain at their most volatile and whippy levels in years, so a tug-of-war between the bulls and bears could easily ensue. The Fed is also working hard to show it will do whatever it takes to save the market, though the reaction to the last two cuts over the past two weeks has been unimpressive.
We have no firm opinion on how long the bearishness will continue. Rather, we are operating in the same manner we always do — by simply reacting to what the charts are telling us. Clearly, the major indices remain in firmly established intermediate and long-term downtrends. Soon, these primary downtrends should pressure the less significant shorter-term bounces that began last week. The Short and UltraShort ProShares ETFs, of which there are now 58 different ones, provide a great way to capture future downside in the market, without the need to sell short.
UltraShort S&P 500 ProShares (SDS)
Shares = 150
Trigger = 64.12 (above yesterday’s high and 40-MA/60 min.)
Stop = 59.71 (below yesterday’s low)
Target = 72.50 (test of the January 22 high)
Dividend Date = expected around March 20
Notes = See commentary above for explanation of the setup. Our share size is relatively small because of high volatility and the associated wider stop that is required. Remember to keep capital risk relatively consistent with each and every trade.
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):
XHB long (350 shares from January 28 entry) – bought 19.08, stop 20.31 (see note below), target 25.60, unrealized points = + 1.27, unrealized P/L = + $445
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
XHB pulled back to near our trailed stop yesterday afternoon, but closed just shy of it. As such, we are using the MTG Opening Gap Rules to manage the position on the open, as it will probably immediately test the new stop. New stop will be 10 cents below the low of the first 20 minutes. However, if it gaps below our trailed stop and then rallies on the open, we may also sell into strength of the bounce, rather than risking it coming back down to its 20-minute low. The bearish patterns of the broad market are causing us to play this long position more conservatively to protect at least half of our maximum gain.
Edited by Deron Wagner,
MTG Founder and