How you are rewarded in this market

Despite early strength in the Semis,
the sellers took control shortly after the market opened Thursday, preventing
the broad market from following through on Wednesday’s bullish reversal. Stocks
drifted lower throughout the entire session until a small wave of buying
provided support during the last thirty minutes. Both the S&P 500 and Dow Jones
Industrial Average
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closed lower by 1.5% and 1.3% respectively. The Nasdaq Composite
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lost 1.1%, but relative strength in the Semiconductor Index
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unchanged, prevented the loss from being much worse. The midcap S&P 400 fell
1.3% and the smallcap Russell 2000 Index
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PowerRating) dropped 1.7%. Each of the
major indices closed in the lower third of their intraday ranges, but off their
worst levels of the session.

It was obviously quite negative that Wednesday’s gains came
completely unraveled only one day later, but the one positive of yesterday’s
action is that lighter volume enabled the market to not have another
“distribution day.” Total volume in both the NYSE and Nasdaq came in 4% lower
than the previous day’s levels, although turnover was still above average in
both exchanges. Although volume was lighter, market internals were overly
bearish. Declining volume in the NYSE exceeded advancing volume by more than 5
to 1, while declining issues outnumbered advancing issues by 3 to 1.

As we often see during corporate earnings season, the overall
market action of the past two days has been quite erratic. Everything about
Wednesday’s rally was bullish, but the major indices fell apart yesterday
nevertheless. While we did not necessarily expect to see further gains
yesterday, at least one day of sideways consolidation would have been a likely
scenario. But unfortunately for the bulls, this type of volatile behavior often
occurs in downtrending markets due to the vast amount of overhead supply. It
seems as if everyone who wanted to buy did so on Wednesday, but there was not
enough follow-through buying interest to absorb the supply of the people who
were selling into strength to cut their prior losses. Simply put, more overall
sellers than buyers will prevent a rally from developing, no matter how powerful
any one day’s action may be. This is the reason we recently advised a mostly
cash position until we see upside follow-through to Wednesday’s gains.

Looking at the broad market indices, the daily charts are now
quite messy and indicate no clear sense of direction in the short-term. The
Nasdaq Composite, for example, closed well above its 200-day moving average on
Wednesday, but closed below its 200-MA yesterday. The short-term shows the
Nasdaq sitting in “no man’s land,” as it is in the middle of Wednesday’s range
and could easily go either direction from here:

Showing among the most indecision is the Dow Jones Industrials
over the past several days. It’s not too often that you see a triple digit gain
in the Dow, followed immediately by a triple digit loss the next day:

While the anticipated short-term direction of the broad market
is anybody’s guess, the intermediate-term picture still shows each of the major
indices in confirmed downtrends. Keep this in mind when making your trading
decisions, as the technicals of the “big picture” are always more significant
than technical analysis of a shorter time frame. You may wish to review those
downtrend lines, support, and resistance levels in yesterday’s Wagner Daily.
Of course, the continued deluge of earnings reports over the next several weeks
will continue to spur a tug-of-war between the bulls and bears that will surely
result in losses if you overtrade. Cash is king right now, but at least consider
reducing your position size if still actively trading the current market.
Traders who have the discipline and patience to sit on the sidelines when the
picture is fuzzy are usually handsomely rewarded.

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