Was yesterday bullish or bearish? Let’s find out
The broad market suffered from a stupendous
selloff yesterday morning, but made an equally massive recovery in the
afternoon. By day’s end, the major indices had finished near unchanged levels,
but the closing percentage changes concealed the wild intraday action that
preceded. The S&P 500, for example, was showing a 1.6% loss at its 12:00 noon
intraday low, but the index reversed all the way back to finish 0.1% higher, as
did the Dow Jones Industrial Average. The Nasdaq Composite closed 0.3% lower,
but that was a far cry better than its 2.4% mid-day loss. The small-cap Russell
2000 Index was unchanged, but the S&P Midcap 400 slid another 0.5%.
Turnover across the board surged to monstrous levels yesterday, indicating that
institutional program trading was abound. Total volume in the NYSE increased by
39%, while volume in the Nasdaq was a gargantuan 53% higher than the previous
day’s level. For the first time in approximately one year, more than three
billion shares traded hands in the Nasdaq. You had to look back even further to
find the last time that volume in the NYSE exceeded yesterday’s level. Market
internals were negative, but improved dramatically as the market rallied in the
afternoon. At its worst level, declining volume in the NYSE exceeded advancing
volume by more than 12 to 1, but the ratio finished negative by only 3 to 2. The
Nasdaq ratio recovered from an unbelievably negative margin of 23 to 1 at its
intraday low, yes 23 to 1 (!!), to finish negative by 3 to 1.
The big question on traders’ minds is what to make of yesterday’s action. The
bearish argument is that yesterday morning’s selling coincided with breaks of
pivotal support levels in the major indices, humongous volume, and the worst
market internals in years. However, extreme ratios in the market internals have
historically coincided with market bottoms or tops. Additionally, it was bullish
that the broad-based indices recovered from the morning’s substantial losses.
The intraday price action of a large selloff in the morning and subsequent
afternoon rally caused a plethora of bullish “hammer” candlestick patterns to
form on the daily charts of many individual stocks and the major indices. But a
lot of stocks and indices also broke and closed below key support levels
yesterday. A good example of this is the S&P Midcap SPDR
(
MDY |
Quote |
Chart |
News |
PowerRating), which
mirrors the S&P Midcap 400 Index. Looking at the chart below, notice how MDY
closed below both its 200-day
moving average
and prior closing low from May, but also formed a bullish “hammer” candlestick:
In scanning the market after yesterday’s close, we came across literally
hundreds of stocks and ETFs with similar chart patterns to MDY above. Obviously,
a formation such as this provides a lot of mixed signals. The amount of overhead
supply left behind in the wake of a major break of support always makes it
challenging for a stock or index to quickly recover to its prior range. However,
the huge surge in volume indicates that institutional trading was definitely at
work on both sides of the market yesterday. As we frequently discuss, it is the
participation of mutual and hedge funds that moves the markets, so a sudden
accumulation of stocks at current levels could generate the momentum necessary
for the market to reverse.
We at Morpheus Capital are taking a “wait and see” stance on yesterday’s action.
We covered some of our short positions into weakness when they hit or came close
to their downside price targets yesterday morning, but still remain net short in
our hedge fund. Because we are treating yesterday as a major reversal attempt,
we are not planning on entering new short positions unless the market
quickly erases yesterday afternoon’s recovery. Conversely, we feel it is unwise
to blindly begin buying stocks just because of one session of bullish price
action. Therefore, your best bet is to simply focus on managing existing
positions and patiently wait to see if the market brings us any upside
follow-through. If it does, we are prepared to present you with the strongest
ETFs that are likely to lead the market’s advance. Until then, we remain short
HALF of our position in the Dow Jones DIAMONDS
(
DIA |
Quote |
Chart |
News |
PowerRating), as we covered the
first half of our shares for a nice gain near yesterday’s low. We also are long
the iShares 20+ year bond index
(
TLT |
Quote |
Chart |
News |
PowerRating) and the Euro Currency Trust
(
FXE |
Quote |
Chart |
News |
PowerRating),
although the latter appears to be failing its breakout and is close to our stop.
Open ETF positions:
Short (half position) DIA, long TLT and FXE (regular subscribers to
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.)
Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of
Morpheus Trading Group (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
morpheustrading.com or send an e-mail
to deron@morpheustrading.com.