Commentary:
It was a tug-of-war between the bulls and bears yesterday, as the stock market see-sawed throughout the entire session. The bears eventually grabbed the upper hand, causing the main stock market indexes to post significant losses and finish near their worst levels of the day. The Nasdaq Composite lost its relative strength and fell 1.9%. The S&P 500 and Dow Jones Industrial Average lost 1.2% and 1.0% respectively. The small-cap Russell 2000 closed 1.4% lower. The S&P Midcap 400 Index similarly declined 1.2%.
Turnover rose across the board, causing both the NYSE and Nasdaq to register a bearish “distribution day.” Total volume in the NYSE increased 3%, while volume in the Nasdaq rose 6% above the previous day’s level. After two consolidation days on declining volume, yesterday’s losses on higher volume hinted at the first instance of institutional selling. However, note that volume was also tracking higher when the broad market rallied into positive territory at mid-day. This tells us institutional buying was also present earlier in the day. Market internals were obviously negative, but not by an overwhelming margin. In the NYSE, declining volume exceeded advancing volume by 3 to 1. The Nasdaq ratio was negative by 4 to 1. Again, the session was really just a tug-of-war in which the bears ascertained the longer end of the rope by the closing bell.
You may want to keep an eye on the Market Vectors Steel (SLX) today, as it positioned for a bullish move in the near-term. Its daily chart is shown below:
Last month, SLX showed great relative strength by moving to a fresh all-time high in the face of a weak broad market. It subsequently entered into a gentle, three-week correction that ended when SLX formed a bullish “hammer” and bounced off support of its 50-day MA. After climbing steadily off its 50-day MA, it eventually posted a lower close yesterday, but only by 5 cents. Considering the 1.2% loss in the S&P 500, it showed great relative strength. More importantly, it is poised to break out above resistance of its one-month downtrend line (the red dashed line). A firm rally above yesterday’s high should at least send SLX back to its 52-week high, with good odds of breaking out to a fresh record high.
Considering the bullish near-term patterns on the daily charts of the major indices, yesterday’s action was a bit disappointing. But considering how far stocks have rallied off their lows in such a short period of time, the pullback still isn’t very deep. Long-time followers of this column already know that Fibonacci retracements are one of the most accurate ways to predict the likelihood of a trend resuming in its primary direction after a correction occurs. Despite yesterday’s losses, the S&P, Nasdaq, and Dow are each holding above their respective 38.2% Fibonacci retracment levels. This is found by measuring their current prices, in relation to the rally from their March 17 lows to March 24/25 highs. Further, the 20-day EMAs are still acting as support for the major indices, although the 50-day MAs were slightly violated yesterday.
The direction of the main stock market indexes over the next 1 to 3 days will likely determine the trend of stocks throughout the next month. Overall, the technicals still favor short to intermediate-term strength. But if the the major indices begin retracing more than 61.8% of their recent gains, it could get really ugly. New lows would likely follow in short order. As long as one maintains discipline to adhere to predetermined stop loss prices, the risk/reward to the upside is quite positive, and the danger of sustaining big losses is minimal. This, of course, is only true if one manages the trading account like a disciplined, professional trader. Falling into “hope” mode when the going gets rough is a loser’s game.
Today’s Watchlist:
There are no new setups in the pre-market today. If anything extraordinary comes across our radar, we’ll send an intraday e-mail alert. Otherwise, we’ll just focus on managing our existing positions for maximum profitability. Note that SMH did not trigger and has been removed from our watchlist.
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 (200 shares from March 18 entry) – bought 67.70, stop 68.73, target 77.30, unrealized points = + 3.02, unrealized P/L = $604
INP long (200 shares from March 24 entry) – bought 66.26, stop 62.71, target 75.70, unrealized points = + 2.16, unrealized P/L = + $432
EWT long (700 shares from March 26 entry) – bought 16.60, stop 15.59, target new high (will trail stop), unrealized points = (0.50), unrealized P/L = ($350)
IYT long (250 shares from March 25 entry) – bought 86.69, stop 83.63, target 92.30, unrealized points = (1.13), unrealized P/L = ($283)
Closed positions (since last report):
-
DUG long (300 shares from March 19 entry) – bought 40.22, sold 37.45, points = (2.77), net P/L = ($837)
Current equity exposure ($100,000 max. buying power):
- $60,492
Notes:
We used the MTG Opening Gap Rules to manage DUG yesterday morning, but it still hit our stop later in the day. The breakout above the multi-month downtrend line and 50-day MA looked good at the time of entry, but it quickly failed. Since DUG violated the base it had broken out from, we no longer want to be long.
Edited by Deron Wagner,
MTG Founder and
Head Trader