What a wild end to a volatile week! Last Friday, news of a major liquidity problem at brokerage giant Bear Stearns caused the S&P 500 to reverse from a pre-market gap up of more than 1% to a swift loss of 2% within the first thirty minutes of trading. Stocks chopped around after the opening slide, then built on their losses in the afternoon. By day’s end, the Nasdaq Composite had plunged 2.3%, the S&P 500 2.1%, and the Dow Jones Industrial Average 1.6%. The small-cap Russell 2000 and S&P Midcap 400 indices slid 2.5% and 1.9% respectively. The main stock market indexes settled in the bottom third of their intraday ranges. For the week, the major indices were nearly unchanged.
Total volume in the Nasdaq increased 2%, while volume in the NYSE ticked 3% below the previous day’s level. Turnover was above average in both exchanges. Market internals were nasty. In both the NYSE and Nasdaq, declining volume exceeded advancing volume by a whopping margin of more than 12 to 1. This tells us the selling was extremely broad-based. Only the Gold and Silver sector provided a bit of shelter from the storm.
Technical analysis never provides a guarantee as to which direction the broad market, stocks, or ETFs will go. What it does provide, however, is a logical, educated way to anticipate direction a majority of the time. Technical analysis, along with sound risk management, has enabled us to achieve consistent profitability of our ETF trades in the six years since inception of this newsletter. Nevertheless, there are times when the power of major news events causes the stock market to virtually ignore technical analysis, including support and resistance levels.
Last Friday morning’s opening gap up in the Nasdaq 100 was very significant because the index was poised to rip above its 20-day EMA. Instead, dramatic news of emergency liquidity measures at Bear Stearns immediately triggered a swift reversal. Other than adhering firmly to all pre-determined stop prices, there’s obviously not much one can do when situations like that occur. The most important take-away from last Friday’s session is it’s become apparent we have entered a primarily news-driven environment.
Because brokerage firms like Bear Stearns are among the very backbone of the U.S. financial system, we view last Friday’s developments as extremely alarming. Even more concerning is that the Feds emergency quarter-point rate cut over the weekend has not had a positive effect on the S&P and Nasdaq futures in the pre-market. The instant buyout of Bear Stearns by JP Morgan is also being ignored. Now that we’re in a news-driven environment, the most dangerous thing is we don’t know what was really happening behind the scenes in this whole mess. News could easily have a cascading effect and get much worse, though we certainly hope not.
We are reluctant to discuss technical support and resistance levels in today’s commentary. We’ll take an updated technical look at the market tomorrow, but let’s first see how today plays out. Remember that news-driven markets are unpredictable and can reverse on the dime, so even selling short can be risky at these levels. Let us just remind you once again that capital preservation needs to be your first and foremost priority right now! Above all else, honor your stop losses and don’t fall into “hope” mode!
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):
QLD long (300 shares from March 13 entry) – bought 65.86 (avg.), stop 63.33, target 74.90, unrealized points = + 0.54, unrealized P/L = + $162
Closed positions (since last report):
FXI long (150 shares from March 13 entry) – bought 134.82, sold 132.54, points = (2.28), net P/L = ($345)
Current equity exposure ($100,000 max. buying power):
FXI failed to follow through from Thursday’s strength and stopped us out last Friday morning. However, because we intentionally entered the trade with minimal share size, the loss was less than half of our average loss. With today’s pre-market gap down, QLD may hit the stop, but remember to use the MTG Opening Gap Rules to manage the position if it opens below our stop. If it opens below our stop, new stop will be 10 cents below the low of the first 20 minutes.
Edited by Deron Wagner,
MTG Founder and