The S&P started a new downtrend
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S&P and Nasdaq’s break of their 50-day moving averages took its toll
yesterday, as the broad market sold off sharply and turnover increased across
the board. The major indices gapped down modestly on the open, trended steadily
lower throughout the day, then finished near their intraday lows. Small and
mid-cap stocks, which may have begun losing their relative strength, sustained
the worst losses. The Russell 2000 Index fell 1.5% and the S&P 400 dropped
1.3%. The S&P 500 lost 0.8%, but the Dow Jones held up relatively well and
lost only 0.4%. The Nasdaq Composite shed 0.6%, but the loss would have been
much worse if not for the impressive relative strength in the Semiconductor
Index ($SOX). Oddly, the $SOX was the only industry sector we follow that closed
higher on the day, albeit only by 0.1%.
style=”FONT-FAMILY: Arial”>Volume finally picked up yesterday,
indicating a return of institutional activity on the sell side. Total volume in
the NYSE jumped 18%, while volume in the Nasdaq increased 21% above the previous
day’s level. The substantial losses on firmly higher volume made yesterday a
clearly defined “distribution day.” Unfortunately for the bulls, it marked the
fifth “distribution day” in the NYSE within the past four weeks and fourth in
the Nasdaq. While one to three days of institutional selling is normal within
the context of bull markets, stocks typically have a very difficult time
recovering from the overhead supply of four or more “distribution days” within a
four-week period. If the technical damage on the charts is not enough reason for
bulls to pull in the reins, the high number of “distribution days” flashes a
clear red flag.
style=”FONT-FAMILY: Arial”>Historically, most bull markets come
to an end, or at least sustain a sharp correction, in one of two ways. The first
is when the number of “distribution days” increases to more than two or three
within a month (as discussed above). Second is when former market leaders begin
to lose their strength and break support. As you probably noticed, recent market
action has seen both of these scenarios occur. Former market leading stocks such
as GOOG, AAPL, and NTRI have all lost their relative strength and have failed to
recover from the break of their 50-day moving averages. Worse is that we have
begun to see a complete lack of leadership within any industry sector.
style=”FONT-FAMILY: Arial”>Since the new year began, two of the
strongest sectors have been Gold Mining ($GOX) and Oil Service ($OSX), but both
sustained major losses yesterday. The $GOX collapsed 7.6%, causing the index to
break support of an uptrend line that had been in place since mid-December.
Similarly, the $OSX plummeted 6.1% yesterday and broke support of the neckline
on the bearish “head and shoulders” pattern we have been discussing over the
past two days. Considering we have been short OIH (Oil Service HOLDR) since
February 3, we were obviously pleased with the ETF’s one-day decline of nearly 9
points! The daily chart of OIH below illustrates the break of the neckline at
the $146 level, as predicted in yesterday’s style=”FONT-STYLE: italic”>Wagner Daily. Also, note the recent days
of higher volume selling (aka “distribution”):
style=”FONT-FAMILY: Arial”>Despite yesterday’s huge loss, we
expect further downside in OIH because of the specific chart pattern. When a
stock or ETF breaks the neckline of a “head and shoulders” pattern, it’s
predicted decline is typically equal to the distance from the top of the head
down to the neckline. Looking at the chart above, you can see this equates to a
range of 11 points, or 7%. Therefore, a downside target on the OIH short would
technically be 7% below the neckline, or a price in the $136 area. We have found
the “head and shoulders” pattern will follow through with this predicted drop
about 60% of the time. However, note that support of the 50-day moving average
is presently just over $138, so that level may be a safer place to take profit
or at least tighten your stop.
If
we were forced to pick one industry to buy, Semiconductors are probably showing
the most relative strength right now (outside of the Chinese stocks and ETFs).
However, we do not advise
fighting the overall market trend. It makes no sense to go long the only sector
that is holding up when you can easily short just about every other sector.
Trading with a “top-down” mentality is usually the safest and most profitable
way of positioning yourself. This means that one must first be sure to trade in
the general direction of the market before determining which individual sector
and stocks to trade.
The
S&P 500 broke support of its prior low from January yesterday, causing the
index to form a “lower low” on its daily chart. This means the S&P has now
formed both a “lower high” and “lower low” on its daily chart, technically
forming a new intermediate-term downtrend. The daily chart of SPY (S&P 500
Index) illustrates this:
The
break of the 50-day MA created a lot of overhead supply and yesterday’s break of
the prior low created more. Therefore, we expect the S&P to have a very
difficult time putting in any kind of significant rally attempt in the
short-term. Just as water flowing down a hill always follows the path of least
resistance, so does the stock market. Even if the bears take a rest, it would
require a lot of demand to absorb all the supply that has been created over the
past two weeks. Needless to say, our overall bias on the broad market remains on
the short side. In addition to OIH, we remain short SPY, currently showing a
1-point gain from our entry point, and XLU, which is showing a small profit on
the short side.
size=2>
style=”FONT-WEIGHT: bold; FONT-FAMILY: Arial”>Open ETF
positions:
Short OIH, SPY, and XLU (regular subscribers to href=”https://morpheustrading.com/services.shtml”
target=”New Browser Window (target=”>The
Wagner Daily receive detailed stop and target prices on open
positions and detailed setup information on new ETF trade entry prices. Intraday
e-mail alerts are also sent as needed.)
style=”FONT-STYLE: italic”>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 href=”https://morpheustrading.com”>morpheustrading.com or send an e-mail to
deron@morpheustrading.com
.