After gapping lower on the open, stocks quickly reversed into positive territory last Friday morning, but the bears resumed control in the afternoon, sending the major indices down to new session lows. Blue-chip stocks showed relative weakness for a change, causing the Dow to fall 1.2%. The S&P 500 lost 0.8%, as both the Nasdaq Composite and small-cap Russell 2000 slipped 0.4%. The S&P Midcap 400 shed 1.0%. A bounce in the final hour enabled the main stock market indexes to settle above their worst levels of the day, but they still closed near their lows of the week.
Turnover rose in both exchanges, indicating the presence of institutional selling. Total volume in the NYSE increased 7% above the previous day’s level, while the Nasdaq volume similarly ticked 8% higher. Volume levels in both the NYSE and Nasdaq moved back above 50-day average levels, but not by a wide enough margin to declare a high volume capitulation. In downtrending markets, near to intermediate-term bottoms are often marked by the large losses and sharply higher turnover that occurs when the last of the bulls finally “throw in the towel” and capitulate to selling. We haven’t seen that yet.
The S&P 500 followed the Nasdaq by setting a new 52-week closing low last Thursday. On Friday, the Dow joined the S&P 500 by falling to a fresh 52-week closing low. With each of the “big 3” main stock market indexes sitting at new 52-week lows, the broad market may be setting up to begin its third leg down of the primary downtrend from the October 2007 high. The intraday lows from January 22 and 23 of this year may still provide a bit of price support, but one must look to the longer-term weekly and monthly charts to find the next major levels of support. As illustrated last week, the 50% Fibonacci retracement from the October 2002 lows to the October 2007 highs are the next key areas of support if the January lows are broken. To refresh your mind, here’s the S&P 500 monthly chart:
If I tell the average non-technical investor that the S&P 500 could easily fall another 9%, down to the 1,172 area, they may find it hard to believe. But when looking at the “big picture” of the S&P 500 on a monthly chart, a correction down to the 1,172 area only represents a 50% retracement of the monstrous five-year bull run that almost doubled the value of the S&P 500 from its October 2002 low. If that happens, we do not yet have an opinion as to whether or not a 50% S&P 500 retracement would mark a definite bottom in the broad market. However, one thing we really don’t like about the monthly chart of the S&P 500 is that the index ran out of gas right at resistance of its all-time high from the year 2000 (circled in pink). This means the S&P now has a bearish “double top” formation in place. Unfortunately, we know from experience that “double tops” on long-term monthly charts often lead to severe losses that exceed 50% retracements.
The good news is that downside momentum appears to be slowing in the near-term. The Banking Index ($BKX) actually showed relative strength by closing positive last Friday. This occurred after bouncing off key support of its prior low from January:
If the “smart money” starts buying financials at these depressed levels, it could lead to a tradeable counter-trend bounce in the broad market. Nevertheless, it’s risky to blindly call a bottom without some type of price and/or volume confirmation. The major indices could easily probe below their intraday lows from January and trigger a slew of protective stops before the specialists begin scooping up shares. Overall, we feel both long and short positions are risky with the major indices at such pivotal levels, though the long-term trends clearly continue to favor the short side. This is a good time to patiently wait on the sidelines, preserving capital until stocks show their hand for the direction of their next move.
Using a tight trailing stop, we sold the UltraShort Real Estate ProShares (SRS) position last Friday morning for a gain of nearly 9 points. We also sold the UltraShort S&P 500 ProShares (SDS) on the open, netting a 2.5 point gain. As both positions were entered only the previous day, this is a good example of how we’ve been saying that a very short-term time horizon on your trades is much better in a bear market. We are once again “flat and happy,” awaiting the next trading opportunity with a nice risk/reward ratio.
There are no new setups for today.
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):
SRS long (100 shares from March 6 entry) – bought 118.13, sold 127.04, points = + 8.91, net P/L = + $889
SDS long (300 shares from March 6 entry) – bought 65.80, sold 68.31, points = + 2.51, net P/L = + $747
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert in the pre-market, we sold SDS on the open. We subsequently sent an alert that we were raising the stop on SRS to lock in gains from its opening strength. SRS hit the tight trailing stop a few minutes later, securing a solid gain.
Edited by Deron Wagner,
MTG Founder and