This chart says take profts on shorts now

The broad market’s steady downtrend continued Tuesday, as
stocks registered another day of higher volume losses. Although the major
indices began the day with an opening gap up, the bears took control after the
first hour of trading and caused both the S&P
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to fall below their respective lows of the previous day. Stocks attempted to
reverse later in the afternoon, but it was a frivolous effort. Sellers were in
force during the final hour of trading and the major indices closed near their
intraday lows. Small caps led the way lower, as the Russell 2000 Index
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fell 1.2%.
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since October 4, correspondingly moved lower and is now showing a marked to
market gain of approximately 4 points. The Nasdaq Composite, which often follows
the direction of small cap stocks, lost 0.9%. The midcap S&P 400 Index
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dropped 0.6%, but the S&P 500 lost only 0.2%. The Dow Jones Industrial Average
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bucked the trend and eked out a gain of 0.1%.

Volume rose across the board yesterday, causing both the S&P
and Nasdaq to register another bearish "distribution day." Total volume in the
Nasdaq surged 32% higher, while volume in the NYSE was 6% higher than the
previous day’s level. Not surprisingly, market internals were negative as well.
Declining volume exceeded advancing volume by a margin of 3 to 1 in the Nasdaq.
The NYSE ratio was negative by only 1.8 to 1. A majority of the down days over
the past month have occurred on higher volume, while only one up day has been on
higher volume. This clearly indicates that institutions have been steadily
selling. The downtrends on the daily charts of the major indices confirm this as
well.

The technical breakdown that began earlier this month
escalated further yesterday, as the broad market closed at new multi-month lows
and more of the indices fell below their 200-day moving averages. In yesterday’s
Wagner Daily, we discussed how the Semiconductor Index
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broken support and was headed down to its 200-day MA as well. The $SOX, which
lost another 1.7% yesterday, has been a major drag on the Nasdaq. Although it
tried valiantly to hold above its 200-day MA, downward pressure in the small
caps and tech stocks caused the Nasdaq Composite to finally close below its
200-day moving average as well. It was the first time the index has closed below
its 200-day MA since May 16 of this year. The Nasdaq has posted losses in five
of the last six sessions since rallying into resistance of its daily downtrend
line on October 4:

Although not shown on the chart above, the Nasdaq has a band
of horizontal price support at the 2,050 area that was established throughout
the month of June. Odds are good the Nasdaq will bounce after its initial test
of this support level. As such, this would be a good area to take profits on any
short positions. At the least, we recommend tightening your stops on any Nasdaq-related
short positions so that you can protect profits. Even though the daily chart
shows price support ten points below yesterday’s close, note that the Nasdaq has
just broken support of its three-year uptrend line on the long-term monthly
chart:

Joining the Nasdaq on yesterday’s break of the 200-day moving
average was the smallcap Russell 2000 Index, which similarly closed below its
200-day MA for the first time since May 17:

Like the Nasdaq, the Russell also has fallen below support of
its multi-year uptrend line on the monthly chart. As such, we remain confident
that our short position in IWM, which tracks the Russell, will hit its profit
target of 61.10. But regular subscribers will notice we have trailed our stop
lower to protect profits in case it does not.

The S&P 500 has been trading below its 200-day MA for the past
week, while the Dow has not closed above the 200-day MA since September 30. This
means that all three of the major indices are now below their 200-day moving
averages, a bleak sign for the intermediate and long-term direction of the broad
market. Although the technical picture of the market is quite bearish right now,
remember that nothing goes straight down for long without bouncing along the
way. Don’t get sloppy on initiating new short positions without proper entry
points. Nevertheless, we definitely are not advocating new long positions
in an attempt to catch a bottom. Major technical damage has been done and retail
"panic selling" could cause the Nasdaq to fall much further before
finding support. The charts show no reason to be positioned on the long side of
the market right now, except perhaps in gold-related issues. The start of
quarterly earnings season is another good reason to be cautious.

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