Here’s why I’m short DIA and SPY
After trading sideways throughout the morning, stocks began to sell off at mid-day, but a recovery in the final ninety minutes of trading lessened the broad market’s losses. Hardest hit of the major indices were the Nasdaq Composite and Dow Jones Industrial Average, each of which fell 0.6%. The S&P 500, down as much as 0.6% intraday, closed only 0.3% lower. Both the small-cap Russell 2000 and S&P Midcap 400 indices showed a bit of relative strength by closing within 0.1% of unchanged.
Remarkably, the S&P avoided a bearish “distribution day” by seeing yet another decline in turnover. Despite the passing of the holiday weekend, total volume in the NYSE was 1% lighter than the previous day’s level, causing the exchange to once again register its lightest volume day of the year. Conversely, total volume in the Nasdaq increased by 18%, causing that index to fare worse by registering a “distribution day.” It was the second such day of institutional selling within the past four sessions and the fourth within the past four weeks. Lessening the impact, however, was that volume in the Nasdaq was still below its 50-day average level.
Looking at yesterday’s sector action, most of the major industries closed lower. The biggest losers were spread among sectors such as Semiconductors
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PowerRating). Although the Nasdaq finished one point above above its April 11 closing price, each of the aforementioned sectors continued to show relative weakness by closing below their respective prior lows from last week.
On the upside, both Gold Mining
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Gold Trust
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high. Similarly, a new all-time high in the price of Crude Oil yesterday helped
the oil production and oil service issues as well. The Oil Service HOLDR
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PowerRating) rallied 1.6% and finished only 2.1% off its record high. While many other sectors began to break key support levels last week, we felt that the price retracements in Gold, Metal, and Oil sectors were merely healthy corrections within the context of strong primary uptrends. As such, we began saying last week that Gold, Metal, and Oil are the only sectors we are comfortable being long; yesterday’s sector action certainly confirmed our analysis.
One formerly strong sector that has swiftly reversed course since the beginning of the month is the Dow Jones U.S. Real Estate Index ($DJUSRE). Take a look at the daily chart of the iShares ETF that tracks the sector, which trades under the ticker of
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As you can see, IYR was recently on a major tear, trending sharply higher until it peaked on March 17. After a subsequent correction down to its 20-day
moving average, IYR attempted to resume its uptrend, but set a “lower high” on March 29 instead. A “lower high” that follows a parabolic uptrend is always a warning sign to the bulls, but the confirmation of the trend reversal did not occur until IYR also set a “lower low” as well. This occurred when it first closed below its March 27 close in the beginning of April. Upon doing so, downside momentum promptly accelerated, causing IYR to fall below its 50-day
moving average on April 10. Since then, IYR has been in a freefall, closing lower in each of the past seven sessions.
At this point, there is no doubt that the bears are in firm control of the Real Estate sector (REITs), but we definitely are not interested in selling short IYR at its current level. Instead, we have put it on our short selling
watch list and are patiently waiting for a bounce into new resistance of its 50-day
moving average. If you missed this initial drop in IYR, don’t fret because the second leg down is often more substantial and lower risk. However, as always, a proper entry point that provides a positive risk/reward ratio is required. We feel such a scenario would occur if IYR
rallies back up to the 70.50 to 71 area, at which time we will probably initiate
a new short position. You may also consider the iShares Cohen and Steers Realty
Majors Index
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PowerRating), which has a similar chart pattern to IYR.
As for the broad market, the S&P 500 initially looked like it was going to break lower, away from the magnetic strength of its 50-day
moving average yesterday, but it finished the day within the range of its past four days. The Dow also closed just above its April 11 low, although it finished below its 50-day MA for the first time since February 7. Overall, the short-term bias remains cautiously bearish, but the lack of confirmed institutional selling has us on alert. Until decent volume comes into this market, don’t be surprised by any type of erratic action such as false breakdowns and false breakouts. Remember that we are also in the heart of earnings season, and both positive and negative reactions to earnings reports can be exaggerated in low-volume environments.
Open ETF positions:
Short
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PowerRating) (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)
Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron’s other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.