I am short these 3 sectors

Turnover was nearly the same as the prior day’s levels in both exchanges. In
the Nasdaq, total volume increased by 1%, but volume was 1% lower in the NYSE.
While yesterday’s broad market gains were positive, it would have been more
bullish if volume had also increased across the board. Technically, the one
percent increase in turnover gave the Nasdaq a bullish “accumulation day”
yesterday, but the S&P did not confirm. More importantly, don’t forget that
the Nasdaq has still had four days of institutional selling within the past four
weeks, while the S&P has had five such “distribution days.”

Just as steadily uptrending markets typically have pullbacks along the way,
weak markets always bounce within the course of their downtrends. On a technical
level, nothing really significant occurred with yesterday’s action that would
cause us to change our short and intermediate-term bearish bias. The Nasdaq
Composite managed to close back above its 50-day moving average, but only by one
point. Furthermore, the index only bounced to the 38.2% title=https://morpheustrading.com/articles/fibo.html
href=”https://morpheustrading.com/articles/fibo.html”>Fibonacci retracement
level from its Feb. 1 high down to its Feb. 7 low. We have illustrated this
on the hourly chart of the Nasdaq below:

Unless the Nasdaq closes above the 61.8% Fibo retracement (the red line at
the 2,284 level), we must assume the short-term bias favors the downside. Also
be aware that overhead resistance of the 20-day MA converges with the 61.8%
Fibonacci retracement, which adds further resistance.

Unlike the Nasdaq, the S&P 500 still closed below its 50-day moving
average. But like the Nasdaq, the S&P also finished at the 38.2% Fibonacci
retracement level of its short-term downtrend (from the Jan. 30 high down to the
Feb. 7 low). Curiously, the S&P’s 20-day moving average also converges with
the 61.8% Fibo retracement level, just like it does on the Nasdaq. If the
S&P bounces high enough, 1,274 is that convergence point that should provide
strong resistance.

Yesterday’s gains enabled the S&P 500 to fully recover all of its
February 7 loss, while both the Nasdaq Composite and Dow Jones Industrials also
recovered their losses and then some. However, it is notable that both the
Russell 2000 and S&P 400 indices lagged behind this time, recovering only
about one-third of their prior day’s losses. This is interesting because,
until recently, both the Russell and S&P 400 had been showing relative
strength to the other indices. Because these two indices were former market
leaders, their sudden relative weakness over the last several days is not a good
sign for the broad market. As we discussed yesterday, strong markets need
leadership somewhere, but former market leading sectors such as Oil and Gold
have started to get whacked. Now it appears that small and mid-caps are poised
to do the same. Semiconductors have held up well the past several days, but the
index is still in a trading range. If sector leadership remains absent, the
market will have nothing to support itself.

We remain short
(
OIH |
Quote |
Chart |
News |
PowerRating),
(
SPY |
Quote |
Chart |
News |
PowerRating), and
(
XLU |
Quote |
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News |
PowerRating). Both OIH and XLU are looking fine, as they
showed relative weakness yesterday by closing nearly flat. SPY closed within a
few pennies of our original entry point, but should be fine as long as it stays
below its 20-day moving average. However, because of the new relative weakness
in the small and mid-cap stocks, we may cover
(
SPY |
Quote |
Chart |
News |
PowerRating) and short
(
MDY |
Quote |
Chart |
News |
PowerRating) (S&P 400) or
(
IWM |
Quote |
Chart |
News |
PowerRating) (Russell 2000) instead. As always, we will send an intraday e-mail alert to
subscribers if we do.

Short OIH, SPY,
and XLU (regular subscribers to title=https://morpheustrading.com/services.shtml
href=”https://morpheustrading.com/services.shtml”
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Deron Wagner is the head trader of Morpheus Capital Hedge Fund
and founder of Morpheus Trading Group (href=”https://morpheustrading.com”>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 title=https://morpheustrading.com/
href=”https://morpheustrading.com”>morpheustrading.com or send an e-mail to
href=”mailto:deron@morpheustrading.com”>deron@morpheustrading.com .