Why I’m short IWM

Traders kicked off August in a
bearish mood, as the broad market sold off on higher volume
yesterday. Each of the major indices gapped down below their previous day’s
lows, then promptly fell further throughout the first hour of trading. Stocks
then oscillated in a sideways range throughout most of the session until a
modest wave of buying in the final thirty minutes lifted the indices off their
lows. Still, the Nasdaq Composite
(
COMP |
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Russell 2000 slid 1.5%. Both the S&P 500
(
SPX |
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Average
(
DJX |
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lower. The S&P Midcap 400 shed 0.8%. Despite the closing losses, the buying
interest into the close helped the broad market to recoup a large portion of its
intraday losses, and also enabled each of the major indices to finish near the
middle of their intraday ranges.

Total volume in the NYSE increased by 6% yesterday, while
volume in the Nasdaq was 2% higher than the previous day’s level. The
broad-based losses combined with the higher volume caused both the S&P 500 and
Nasdaq Composite to register a “distribution day” that was indicative of
institutional selling. It was the second such day of higher volume losses within
the past four sessions. If you have been paying attention to our daily volume
analysis of the broad market, yesterday’s higher turnover should not have come
as a surprise. Considering that volume has been light and decreasing on most of
the market’s “up” days in recent weeks, it makes sense that volume would
accelerate on many of the “down” days. This bearish price to volume ratio “under
the hood” of the stock market shows that hedge funds, mutual funds, and other
institutions remain biased on the sell side. Only a sudden shift to higher
volume “up” days and lighter volume “down” days would indicate the return to a
positive sentiment. Market internals were also firmly negative yesterday,
particularly in the Nasdaq. Declining volume in the Nasdaq exceeded advancing
volume by a margin of 7 to 1. The NYSE ratio was negative by 2 to 1.

Only a few industry sectors finished in higher territory
yesterday, but those that did made substantial moves. The biggest gainer of the
major sectors we follow was the Gold and Silver Sector Index
(
XAU |
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zoomed 2.5% higher and broke out above resistance of a seven-week downtrend
line:

In the August 1 issue of

The Wagner Daily, we
illustrated the bullish setup in the iShares Silver Trust
(
SLV |
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PowerRating). As
anticipated, SLV broke out and rallied more than 3%, alongside of yesterday’s
strength in the $XAU index. We notified subscribers beforehand that we planned
to buy SLV on a rally above the $115.05 level, which happened shortly after the
open, so we are now long SLV with a marked-to-market gain of approximately 2.5
points. The iShares Gold Trust
(
GLD |
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bought the silver ETF instead because it is showing more relative strength than
gold. Taking an updated look at the daily chart of SLV below, you will notice
there is little overhead resistance until the prior high of $133.60 that was set
on May 30. That area of resistance is our profit target on the trade:

Along with gold and silver, the DJ Utilities Average
(
DJU |
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also outperformed the market yesterday. After four days of sideways
consolidation in a tight range, the $DJU rallied 1.1% and closed at a fresh
52-week high. The Utilities HOLDR
(
UTH |
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the $DJU and also closed at a new 52-week high. Notice how higher volume also
confirmed the move. UTH traded more than double its average daily volume
yesterday:

One reason for the broad market’s weakness yesterday is that
the Semiconductor Index
(
SOX |
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primary downtrend line. Recall that we were focused on whether or not the $SOX
would break out above its multi-month downtrend line, but so far it has not. The
$SOX downtrend remains intact for now, but a swift reversal back above that
downtrend line would likely give the overall market a bullish shot in the arm.
Notice how the downtrend line in the $SOX perfectly acted as resistance
yesterday:

Based on the bearish “head and shoulders” pattern in the
iShares Russell 2000
(
IWM |
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PowerRating) that we recently illustrated, we entered a new
short position in IWM yesterday. If it follows through with a break below the
“neckline” at the 66.50 area, it should lead to substantial downward momentum,
but we have a protective stop just above the high of the right shoulder (and the
200-day MA) in case the pattern fails. By the way, remember that the new
ProShares family of ETFs enable you to take a bearish position on the broad
market without being required to sell short. The ProShares Short QQQ (PSQ),
for example, actually gained 1.7% while the Nasdaq 100 Index lost 1.6%.
These new ETFs are a great way to take bearish positions in your non-marginable
retirement accounts that do not allow you to sell short. A complete list of the
ProShares ETFs can be found on the “specialty ETFs” section of the

Morpheus ETF Roundup guide.

Open ETF positions: