Yesterday, bears took control of the indecision
For the second consecutive day, the S&P 500 attempted
to break out to a new 52-week high, but failed to register anything
more than an intraday probe above resistance. The bears took control of the
indecision this time, causing stocks to trend lower throughout the afternoon and
finish with losses across the board. The Nasdaq Composite, S&P Midcap 400, and
the Dow Jones Industrial Average each slid 0.7%, while the S&P 500 fell 0.5%.
The small-cap Russell 2000 lost 1.0%. Each of the major indices gave up most or
all of their previous day’s gains and finished near their intraday lows.
Total
volume in the NYSE was 5% higher, but volume in the Nasdaq was 9% lighter than
the previous day’s level. The mixed turnover caused the S&P to register a
bearish “distribution day,” while the Nasdaq dodged one. Part of the reason for
the divergence in volume was likely attributed to the massive number of shares
that traded hands in the retail drug store stocks, each of which plummeted after
news that Wal-Mart would begin selling generic pharmaceuticals for a mere four
dollars. The volume surge on the handful of drug store stocks accounted for more
than 100 million shares above average levels. This alone resulted in the NYSE
volume being approximately 6% greater. Nevertheless, market internals in both
exchanges were still negative. In the Nasdaq, declining volume exceeded
advancing volume by a margin of just over 2 to 1, while the NYSE ratio was
negative by just under 2 to 1.
In
yesterday’s newsletter, we illustrated how the S&P 500 was facing a “moment of
truth” due to pivotal resistance of its 52-week high. In Wednesday’s session,
the index briefly traded above its 52-week high of 1,326, but closed
fractionally below it. The S&P again traded above the 1,326 resistance level
yesterday morning, but the rally attempt fizzled out. Worse is that the index
gave back all of the previous day’s gain and closed 0.6% below the pivotal
breakout level. While it is still a bit too early to declare an official failed
breakout in the S&P 500, it is certainly setting up to become one. One major
problem over the past few days has been the sudden relative weakness in the
Semiconductor Index ($SOX).
The $SOX
index has led the broad market’s recovery since the lows that were set in July,
but the semis have entered into a corrective phase that has resulted in relative
weakness for the sector. As we pointed out a few days ago, the first sign of
weakness in the $SOX occurred when the index formed a bearish “inverted hammer”
candlestick pattern on September 15, which occurred with resistance of the
200-day moving average just overhead. When an “inverted hammer” forms at the
high of an extended rally, it often marks at least a short-term top in the stock
or index. As such, we sold short the Semiconductor HOLDR
(
SMH |
Quote |
Chart |
News |
PowerRating) the following
day and still remain short. Since then, it has shown relative weakness to both
the S&P and Nasdaq by posting smaller gains on the “up” days and losing more
than the major indices on the “down” days. On a technical level, it is also
important to note that SMH closed yesterday below support of its primary uptrend
line that has been in place since the low of July 21. It also finished firmly
below its 20-day MA for the first time since the current uptrend began.
Further, it broke down on more than double its average daily volume, a sign that
institutions were dumping semiconductor shares into strength. Looking at the
chart of SMH below, notice also how the “topping tails” at its recent high
(circled in pink) preceded yesterday’s break of trendline support:
Never
underestimate the importance of strength or weakness in the $SOX index. Because
the semiconductor stocks are so heavily weighted, the Nasdaq tends to follow the
direction of the $SOX. In turn, the S&P and Dow often follow the direction of
the Nasdaq. Therefore, it’s a fair generalization to say that the $SOX index
leads the broad market. It was the bullish reversal in the $SOX in mid-July that
triggered buying interest off the broad market’s lows. Obviously, this means
that a sudden change in bias in the semiconductor stocks could just as easily
deflate the market. Resistance of the 52-week high in the S&P gives another good
excuse for traders to sell shares right now. Remember that trading can often be
quite volatile and erratic when an index is testing a 52-week high, so be alert
and honor your stops on both sides of the market.
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 .