The Nasdaq: All Bets Are Off

The Nasdaq Composite fell to a new
low of 2006 Monday, as another wave of institutional distribution
resulted in extensive broad-based losses. Each of the major indices opened
nearly flat, but subsequently trended steadily lower throughout the entire day.
Small and mid-cap stocks, the two strongest market segments in the prior bull
market, suffered the largest losses. The Russell 2000 Index
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2.6% and the S&P Midcap 400 tumbled 2.2%, while the Nasdaq Composite
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trailed closely behind with a 2.1% loss. The S&P 500
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Dow Jones Industrial Average
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finished at their intraday lows, which caused a lot of technical damage to the
daily charts.

Total volume in the NYSE increased by 2%, while volume in the
Nasdaq was 8% higher than the previous day’s level. The substantial losses on
higher volume made yesterday another bearish “distribution day,” a rather common
occurrence these days. With a majority of the market’s “down days” still
occurring on higher volume, it is evident that mutual, hedge, and pension funds
are still dumping shares into strength. Confirming this yesterday were extremely
negative market internals. In both exchanges, declining volume exceeded
advancing volume by an astronomical margin of approximately 10 to 1. When
breadth is extremely negative, it usually leaves traders and investors nowhere
to hide. This was certainly the case yesterday, as all but one of the major
industry sectors we follow closed in the red. The DJ Utilities Average ($DJU)
eked out a 0.1% gain.

In the June 9 issue of
The Wagner Daily, we
discussed how the previous day’s action had provided mixed signals as to the
market’s near-term direction. The bullish argument was that the major indices
sold off sharply in the morning, but reversed to finish near their intraday
highs. Most importantly, total market volume that day surged to its highest
level in years. On the other hand, the negative was that the S&P 500 still
closed that session below its 200-day moving average. Over the course of the
three preceding weeks, the S&P had attempted to bounce off support of its 200-MA
on three separate occasions, but it finally failed to hold and closed below it
on June 7. Despite the high volume reversal attempt of June 8, it was bearish
that the S&P failed to recover back above its 200-day MA.

Going into yesterday’s session, we were on the lookout for
potential upside follow-through from the June 8 reversal attempt. Despite
moderate losses on June 9, the major indices had still retained enough of their
gains off the June 8 intraday lows to garner more upside momentum. But
institutions saw the June 8 reversal attempt as a chance to sell more shares
into strength. If each of the major indices would have held above their June 8
lows yesterday, the reversal attempt would still be valid. However, the Nasdaq
undercut the bottom of its June 8 range and finished at a new 7-month low:

Because the Nasdaq closed below its June 8 low, that day’s
reversal attempt has technically been invalidated. This means the next bullish
action that occurs would represent a new reversal attempt rather than a
follow-through day. The reversal days provide us with a warning sign that the
current trend may reverse, but it’s not until the subsequent
follow-through day occurs that we actually consider reversing our positions.
That’s why we warned against “jumping the gun” by going long yesterday, but also
mentioned it was better to simply manage existing short positions rather than
enter new ones after a reversal attempt.

So where does this leave us as we enter today’s session? For
starters, all bets on the long side of the market are off. With the Nasdaq
undercutting its June 8 low, there is simply no technical reason to be long the
market here. If you’re short, you are most likely sitting on a nice profit
regardless of the industry sector, so just continue to trail your stops. As we
have mentioned in the past, very strong trending markets are ideal for trading
the broad-based ETFs as opposed to the specific industry sectors because
everything tends to move in sync.

We remain short a half position of the Dow Jones DIAMONDS (DIA),
as we covered the first half of the position on June 8, near its intraday low.
Presently, the DIA short is showing a marked to market gain of more than 3
points. Our long position in the Euro Currency Trust (FXE) stopped out
yesterday. When we bought FXE on June 2, it was a nice breakout of a
consolidation pattern, but the breakout promptly failed. As such, FXE gapped
down below the low of its range and the long setup is no longer valid. Other
than DIA, our only other open ETF position is the iShares 20+ year T-bond (TLT).
Since our long entry on June 2, TLT has been moving steadily higher towards our
price target.