Net short, and staying that way for now

Just as quickly as the Nasdaq scored
a 1.8% gain in the previous session, the tech-heavy index gave it all
back and then some. The Nasdaq
(
COMP |
Quote |
Chart |
News |
PowerRating) trended steadily lower throughout the
day before finishing with a 2.0% loss and at the bottom of the prior day’s
range. The S&P 500
(
SPX |
Quote |
Chart |
News |
PowerRating) and Dow Jones Industrial Average [
(
DJX |
Quote |
Chart |
News |
PowerRating) fared
better, as both indices retraced "only" half of their gains from the previous
day. The S&P and Dow each declined 0.8%. Small and mid-cap stocks led the broad
market higher yesterday, so it is not surprising those segments also lost the
most yesterday. The Russell 2000 slid 2.7% and the S&P Midcap 400 closed 2.3%
lower.

It was certainly negative that the Nasdaq was unable to hold
on to any of Wednesday’s solid gain, but the sole glimmer of hope for the bulls
is that the index fell on lighter volume. Total volume in the Nasdaq was 25%
lower than the previous day’s level, while the NYSE volume declined by 8%.
Obviously, yesterday’s price action in the broad market was not encouraging for
the bulls, but recent volume patterns actually have been. On Tuesday and
Wednesday of this week, the broad market scored two straight "accumulation days"
by gaining on higher volume. Then, stocks subsequently sold off pretty hard, but
a drop off in turnover prevented a bearish "distribution day" from forming. In
the NYSE, declining volume exceeded advancing volume by a margin of 3 to 1,
while the Nasdaq was negative by nearly 5 to 1.

Several sectors sustained significant losses and technical
damage to their charts yesterday. The Oil Service Index
(
OSX |
Quote |
Chart |
News |
PowerRating) plummeted 4.7%
and was the biggest percentage loser of all the industry sectors we follow.
After bouncing off support of its 200-day moving average in mid-June, the Oil
Service HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating)), which closely follows the $OSX index, attempted to
reverse its downtrend. But after trading above its 200-day MA for a month, OIH
dropped back down to that key support level. Yesterday’s loss caused it to close
firmly below its 200-MA and near its June low. If that low of June 13 fails to
hold over the next few days, we could see a lot of downside momentum develop.
Note the break of support on the daily chart below:

Another industry sector that fell sharply yesterday was the
Dow Jones Transportation Average
(
DJT |
Quote |
Chart |
News |
PowerRating), which lost 4.4%. Until recently,
transports were one of the strongest sectors in the stock market, but its
pattern has become rather bearish, with yesterday’s action confirming the
weakness. The sector first ran into problems when it formed a double top at
resistance of its prior high on July 3. Upon doing so, the sector sold off until
it broke below its 50-day moving average on July 13. The $DJT rallied nicely on
July 19, but closed right below its 50-day MA. As such, resistance of that
50-day MA triggered selling in the sector yesterday, prompting the $DJT to break
below its prior low from July 14. We now expect the index to test support of its
200-day MA within the next several days. The only ETF tied directly to
transportation is the iShares DJ Transportation Index
(
IYT |
Quote |
Chart |
News |
PowerRating), which is shown
below:

Yesterday’s bearish reversal in the Nasdaq was a good
example of why we warned against trying to call a market bottom without first
having confirmation of the major indices breaking out above their downtrend
lines. We illustrated resistance of those downtrend lines, as well as several
key moving averages, on the daily charts of both the S&P 500 and Nasdaq
Composite in yesterday’s

Wagner Daily.
Regardless of technical bounces along the way, we must assume the current
downtrend in the broad market will continue until the charts prove otherwise.
The most consistently profitable method for short-term trading is to merely
follow the direction of the stock market’s trend, then reacting to changes in
trend when they occur. If those trend changes don’t happen, changes to our
plan are not necessary either. We remain net short in the Morpheus Capital
hedge fund and will stay that way until the market gives us a good reason not
to be. Remember to always trade what you see, not what you think!

Open ETF positions: