The Dow is testing support

The Nasdaq wrapped up last week with
another session of losses, as Thursday’s breakdown to a new 9-month low sparked
further downward momentum. The Nasdaq fell 0.8%, the S&P 500 0.5%,
and the Dow Jones Industrial Average 1.0%. The small-cap Russell 2000 Index slid
0.9% and the S&P Midcap 400 shed 0.7%. Since forming its intermediate-term peak
on July 3, the Nasdaq has plummeted 6.9% and closed lower in six of the eight
subsequent sessions. Friday’s losses concluded a nasty week that saw the Nasdaq
Composite lose 4.4% and the S&P 500 2.3%.

Turnover declined a bit last Friday, helping to somewhat
soften the blow of the stock market’s losses. Total volume in the NYSE declined
by 3%, while volume in the Nasdaq came in 12% below the previous day’s level.
The lighter volume losses tells us that stocks dodged another day of
institutional selling, but most of the market’s losses this month have been on
higher volume. Conversely, the only session of accumulation was quickly wiped
out the following day. Market internals were negative last Friday, but were an
improvement over recent measurements. In the NYSE, declining volume exceeded
advancing volume by approximately 5 to 2. The Nasdaq’s ratio was negative by
only 2 to 1.

In the July 14 issue of
The Wagner Daily,
we illustrated how not only the Nasdaq broke down to a new 9-month low, but also
how the other indices broke below support of their intermediate-term uptrend
lines. The prior lows from June 14 are clearly the areas of support to watch for
both the S&P and Dow, while resistance has become those prior uptrend lines.
Notice how the Dow Jones Industrial Average quickly dropped to support of that
June low after breaking its uptrend line:

Going into today’s session, that June low around 10,700
remains a key support level to watch. As you know, the Nasdaq has already broken
below its June low, but the S&P and Dow are, so far, still holding those levels.
Support of the June low in the S&P 500 is at 1,219, which is 1.4% below Friday’s
closing price.

When the market began to fall apart in mid-May, we entered
several ETF positions on the short side that worked out well. We then tested the
water on the long side when stocks retraced off their lows in the latter half of
June, but the bounce was too short-lived to hold positions for more than a week.
Now, most industries have already fallen back down to their June lows or lower.
If there was anything really positive happening in the stock market, we would be
pleased to bring it to your attention. But the reality is that the price action
of the past week was ugly and spanned across nearly every industry sector.

Long-term subscribers of this letter know that we simply focus
on trading the exchange traded funds with the best chart patterns and most
relative strength or weakness to the overall broad market. Whether or not we buy
or sell short depends, of course, on the market direction. We keep things simple
by following the trends as long as they are intact. Clearly, this is not the
time to be long. Oil-related stocks and ETFs are about the only sector that
looks good on the long side, and even that sector can be tricky based on
speculation of the situation in the Middle East. One might assume that oil would
continue to climb because of the current turmoil, but there is a good chance it
is already factored into the price. The spot gold commodity (and GLD) has been
doing well, but the gold stocks themselves have been curiously lagging behind.

As for entering new short positions, the market has dropped a
bit too far, too fast in order to have a positive risk-reward ratio. If,
however, you are already short, consider staying short and trailing stops to
maximize profits. With our
(
MDY |
Quote |
Chart |
News |
PowerRating) short position, we are using the hourly
downtrend line as a basis for resistance in which to trail the stop. We have our
eyes on a few other ETFs to sell short, but we need to see a bounce into
resistance first. Last week’s drop happened so quickly that it was difficult to
enter new short positions unless you got them as the market was breaking down.
While this can be done, there is always a better risk-reward to wait for the
inevitable bounce that follows. Just be sure you are thinking in terms of
selling the bounce short as opposed to trying to pick a bottom for buying
stocks. Also, don’t forget that we are smack in the middle of earnings season.

Open ETF positions: