A Bullish Bounce For Bears (ILF, DIA, SPY, IWM, QQQ)
Stocks ended the session mixed on light trade. What began as a promising day, ended with stocks clinging to minor gains. At the open stocks gapped up sharply but were quickly met with selling pressure and spent the remainder of the day on a downward march. The Dow Jones Industrial Average (NYSE:DIA) showed the most resiliency as it tacked on 0.34%. The Nasdaq (NASDAQ:QQQ) improved by 0.2% while the S&P MidCap 400 advanced by 0.1%. The S&P 500 (NYSE:SPY) closed at par while the small-cap Russell 2000 (NYSE:IWM) slid 0.1%.
Market internals ended day mixed. Volume dropped on the Nasdaq by 17.6% and on the NYSE by 20.4%. Despite the modestly positive price action, declining volume topped advancing volume on the Nasdaq by a ratio of 1.4 to 1 and on the NYSE by a factor of 1.1 to 1. The light volume firmly suggests that institutions were absent from the market on Monday.
A review of the monthly chart of the S&P 500 ($SPX.X) suggests that, for the moment, caution may be warranted on the short side of the market. Although bears still appear to be firmly in control of the market, caution is warranted in the short run. Notice that the S&P has come into support of its 200-week moving average and therefore could easily rally from these levels. A move back to the 1,180 to 1,200 range is certainly not out of the question but if we lose support here, another massive move down could result. We find it very useful to take a step back and look at longer timeframes in order to gain a better perspective on the market following big moves.
The iShares S&P Latin America 40 Index ETF (NYSE:ILF) has been struggling in a three day trading range since finding resistance at its 20-day EMA on August 17th. A move below the three day low of $43.12 could result in a retest of the August 8th swing low. We are watching this ETF closely for a possible short entry.
Although we maintain our bearish bias, the market could find support at the current level. As such, caution is warranted for market Bears. It is interesting to note that a healthy bounce in the market would likely result in an abundance of short setups
Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also 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. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to: email@example.com.
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