Commentary:
The Fed spoke on Wednesday and the market listened, but the message certainly did not digest well the following day. After gapping sharply lower on the open, the main stock market indexes trended steadily south throughout the entire session before finishing at their dead lows of the day. Important levels of technical support were broken, as the major indices averaged losses of approximately 3%. The benchmark S&P 500 plunged 2.9%, the Dow Jones Industrial Average 3.0%, and the Nasdaq Composite 3.3%. The small-cap Russell 2000 and S&P Midcap 400 indices held up only slightly better, tumbling 2.5% and 2.7% respectively. The large-cap Nasdaq 100 suffered a painful 4.1% loss.
Turnover spiked higher across the board, indicating mutual funds, hedge funds, and other institutions were behind the selling. Total volume in both the NYSE and Nasdaq rose 7% above the previous day’s levels. Trading remained above 50-day average levels for the third consecutive day. Not surprisingly, market internals were as ugly as they get. Declining volume in the NYSE trounced advancing volume by a whopping margin of 11 to 1. The Nasdaq adv/dec volume ratio was negative by more than 8 to 1.
The overly bearish breadth tells us very few stocks escaped yesterday’s selling pressure, but the gold and silver sector managed to buck the bearishness, and did so in a big way. The gold and silver sector has been very whippy and erratic in recent weeks, as evidenced by the negative outcome of several buy entries into iShares Silver Trust (SLV). However, yesterday’s action in the sector was substantially more bullish than it was during recent failed breakout attempts. First, StreetTRACKS Gold Trust (GLD), which is tied to the price of the spot gold commodity, closed at its intraday high. Over the past several months, GLD has had a tendency to gap higher on the open, but immediately sell off intraday. This was not the case yesterday. Further, volume in GLD rose to nearly twice its average daily level, pointing to institutional demand on its breakout above horizontal price resistance, which is shown below:
The Market Vectors Gold Miners (GDX), comprised of a basket of individual gold mining stocks, also had a great day. GDX zoomed nearly 6% higher, volume surged higher, and the ETF broke out above it 50-day MA and three-month downtrend line. This is shown on the daily chart of GDX below:
Frankly, the wild, unpredictable opening gaps of the precious metals make us a bit reluctant to hold GLD or GDX overnight. However, all choppy ETFs eventually resolve themselves into steady trends in one direction or the other. If GLD and GDX continue to act well for the next several days, they signal they are ready to enter into new intermediate-term uptrends. In the meantime, until we receive that confirmation, daytraders should consider buying these ETFs on intraday pullbacks, then selling into upward momentum later in the day. This plan of action was suggested to subscribers yesterday morning, so kudos to those who took advantage of our morning suggestion.
On June 24, the Dow Jones Industrial Average bounced perfectly off support of its prior low from March, lending hope to the possibility of at least a near-term bottom. Yesterday’s sell-off, however, dashed that scenario to pieces. After free-falling more than 350 points, the blue chip index sliced through support of its March 2008 low, and closed at its lowest level since September of 2006. The Dow’s convincing breakdown to a fresh 52-week low is shown on the daily chart below:
The dashed horizontal line on the chart above marks the prior 52-week closing low that was set on March 10. On any rally attempt, we can now expect that prior level of support to act as new resistance. When the Dow bounces to approach that new resistance level around 11,740, traders and investors who failed to sell during yesterday’s breakdown will rush to the exit doors in an attempt to “just break even.” This is the psychology behind the creation of price resistance levels.
The broad-based S&P 500 Index is approaching key support of its 52-week low, but is still holding just above it. A drop of just another 10 points (0.8%) will cause the S&P to violate its 52-week closing low of 1,273, which was set on March 10. Again, the dashed horizontal line marks that level:
Despite yesterday’s 3.3% pummeling, the Nasdaq Composite is still well above its March low. The index is even above its 61.8% Fibonacci retracement from its March low to June high. Because of the relative strength the Nasdaq continues to exhibit, one should expect the Nasdaq to be the first of the major indices to surge higher when the broad market eventually manages a substantial bounce.
Yesterday’s blowout may raise the question of whether or not the stock market has reached a level of “capitulation,” which occurs when stocks form a significant bottom after a massive series of drops. Although the long, red bars on daily charts of the major indices may hint at capitulation, the volume levels failed to confirm. When stocks capitulate, the sell-off is typically accompanied by the largest volume levels of the entire downward move. On the daily chart of total NYSE volume below, notice that yesterday’s activity was substantially below its June 20 volume level:
One could logically argue that volume levels were artificially inflated by “quadruple witching” options expiration on June 20, but yesterday’s turnover just didn’t seem to indicate the last of the bulls had finally thrown in the towel. Historically, major market bottoms have not formed until that occurs. Further, we expect the S&P 500 and Nasdaq Composite to follow the Dow in testing their 52-week lows before traders regain enough conviction to step back in to the buy side of the market.
If you’re already short the stock market, you’re undoubtedly sitting pretty, and have no reason to be concerned as long as protective stops are trailed tightly to lock in gains. But while it doesn’t seem the stock market has reached an absolute level of capitulation, new short entries at current levels do not provide very attractive risk/reward ratios. If you’re not presently on the short side, use your time to develop a list of ETFs that have held relatively well throughout the market’s recent selling, then wait patiently on the sidelines. When the market eventually flashes convincing signs that a bottom has formed, you’ll be ready like a sniper to immediately enter the strongest ETFs in the market. Those ETFs, of course, should be among the first to rally back towards their prior highs. We stopped out of Claymore Global Solar Energy (TAN) because the “bull flag” pattern failed yesterday, but this is one ETF we’ll be watching for a potential re-entry point when stocks reclaim its footing. Unless strictly daytrading, there is no good reason to be on the long side of the market right now. Don’t be a hero by haphazardly trying to pick a bottom. Instead, wait for the market to show its hand and trade what you see, not what you think!
Today’s Watchlist:
There are no new setups in the pre-market today. As always, we will send an Intraday Trade Alert if/when we enter anything new, but we’re being very cautious on both sides of the market right now.
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:
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Open positions (coming into today):
- The “bull flag” pattern of TAN failed yesterday, causing it to hit its protective stop. Even the best stock and ETF chart patterns fell apart yesterday.
- UWM hit its stop, but we fortunately closed half the position into strength on Wednesday afternoon.
- Note the new stop on SLX, which is starting to move in the right direction.
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SLX short (150 shares from June 20 entry) – sold short 105.52, stop 107.60, target 91.18, unrealized points = + 2.73, unrealized P/L = + $410
Closed positions (since last report):
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UWM long (150 shares [half position] remaining from June 24 entry) – bought 51.20, sold 49.22, points = (1.98), net P/L = ($300)
TAN long (400 shares from June 24 entry) – bought 28.26, sold 26.70, points = (1.56) net P/L = ($632)
Current equity exposure ($100,000 max. buying power):
- $15,429
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader