This Could Change The Technical Picture For the S&P

The major indices followed up last Thursday’s
broad-based losses with another day of selling last Friday, but
volume once again declined across the board. After beginning the day with an
opening gap down, the broad market trended lower throughout the morning session,
but found minor support and traded in a narrow, sideways range throughout the
afternoon. The S&P 500 Index lost 0.8%, the Nasdaq Composite dropped 0.6%, and
the Dow Jones Industrial Average closed 0.5% lower. Each of the major indices
again closed near their intraday lows, indicating that institutions had no
buying interest ahead of the weekend. The S&P 400 Mid-Cap Index and Russell 2000
Small-Cap Index, both former market leaders, slid 1.1% and 1.3% respectively.
Both indices broke their five-week winning streaks, but remain within 3% of
their all-time highs.

Despite bearish market internals in which declining volume exceeded advancing
volume by nearly 4 to 1, total volume in the NYSE came in less than 1% lower
than the previous day. Turnover in the Nasdaq was 7% lighter. It is important to
note that each of the major indices sustained moderate losses during the past
two days, but total market volume declined both days. Whereas "distribution
days" of higher volume selling typically indicate institutional selling, it is
interesting that mutual funds and other big players showed no signs of rushing
for the exit doors towards the end of last week. The pattern of higher volume on
most of the "up" days and lower volume on the "down" days remains intact,
despite a price correction of 1.5% in the S&P 500 during the past two days. As
such, it is likely that the broad market’s retracement will be a short-term
correction rather than a major market top. However, a string of "down" days on
higher volume could quickly change the technical picture.

During the last two days, the biggest losses have come from sectors that were
formerly high-flying market leaders. Thursday saw a 2.1% drop in the Retail
Index ($RLX), while the Dow Jones Home Construction Index ($DJUSHB) sustained a
4.5% haircut in Friday’s session. Such sector rotation typically presents
near-term short selling opportunities within the sector-specific ETFs, although
you need to be a bit quicker at taking profits when trading against the bigger
picture of a primary uptrend. As detailed to monthly subscribers in last
Friday’s "watchlist," we entered a new short position in RTH (Retail HOLDR) when
it broke its three-month uptrend line. The daily chart of RTH below illustrates
the break of trendline support. Our price target on the short side is the
200-day moving average (the orange line):

Many homebuilder stocks are also breaking their primary uptrend lines and
now present a similar short selling opportunity. There is not an ETF that
specifically tracks that sector. As such, ETF traders may consider building
their own "synthetic ETF" by simultaneously shorting a basket of the Home
Builder stocks such as TOL, HOV, KBH, BZH, RYL, or others. This is the same
thing we suggested when discussing the breakout in the Gold and Silver Index ($XAU)
in the August
4 issue of The Wagner Daily.

Friday’s losses caused the S&P 500 Index to close below its 20-day moving
average for the first time since July 7, but the index is still above support of
both its prior weekly highs and the 50-day moving average. The weekly chart of
the S&P 500 below shows how last week’s 0.6% correction caused the index to
close just above horizontal price support of its prior highs near the 1,220
level:

Although not illustrated above, support of the 50-day moving average is at
1,213, only seven points below the prior highs of the 1,220 level. Because we
expect the S&P 500 to find key support at its prior weekly highs and the 50-day
MA, we are not comfortable with shorting SPY or other broad-based ETFs right
now. However, a low-risk shorting opportunity would present itself if the index
bounces off support between 1,213 to 1,220, but subsequently sets a "lower high"
on the daily chart. If this occurs, new overhead resistance of the 20-day moving
average could provide an ideal entry point on the short side. But most
importantly, remember that we have yet to see any signs of institutional selling
during this recent correction, so shorting the broad market prematurely is
risky.

Unlike the S&P, the Nasdaq Composite remains above support of its 20-day
moving average, albeit only by two points. The daily chart of the Nasdaq still
looks quite bullish and shows the index well above support of its primary
uptrend line, but the weekly chart is showing the possible formation of a
"double top" from its prior high of last December. The chart below illustrates
this problematic area of the 2,190 resistance level, which the Nasdaq closed
above for only a few days before dropping back below it:

It is certainly too early to accurately call it a "double top," but it is
good to be aware of that resistance level so that you can be cautious with
entering new Nasdaq-related positions. The Semiconductor Index ($SOX) is showing
great relative strength, which is likely to hold the Nasdaq up, but the Biotech
Index ($BTK) appears to be entering a short-term correction. The best strategy
for any Nasdaq-related ETFs or stocks is to focus on managing your existing
positions with tight trailing stops, and waiting for the broad market to show
its hand in the short-term before aggressively entering new long positions on
such a small pullback. A few industry sectors such as Retail and Home Building
may present shorting opportunities in the near-term, but stick to specific
industry sectors instead of attempting to short the broad-based ETFs here.

Today’s Watchlist:

Daily Reality Report:

Below is Morpheus Trading Group’s daily performance report of trades that were
closed since the last newsletter, as well as an update on all open positions
from The Wagner Daily. Net P/L figures are based on the $50,000
Wagner Daily model
account size.

Closed positions (since last report):

(none)

Open positions (coming into today):

SMH long (150 shares (half position) from June 1) –

bought 18.36, stop 17.75, target of new highs (will trail stop), unrealized
points = (0.09), unrealized P/L = ($72)

Current equity exposure ($100,000 max. buying power):

$60,031

Notes:

RTH triggered for short entry last Friday. There are no changes to the stops
on SMH and EWA

Deron Wagner