Are Technical Levels Showing A Clear Sell Signal In The Market (SPY, INDEXSP:.INX)
Stocks got wrecked on Friday, but on mixed trade. All five major indices fell 1.3% or more, with the Nasdaq leading the plunge. By the closing bell, the tech-heavy index had slid a hefty 2.3%. The small-cap Russell 2000 dropped 1.8%, while both the S&P 500 (NYSEARCA:SPY) and S&P MidCap 400 fell 1.6%. The Dow Jones Industrial Average saw the least damage as it contained losses to 1.3%.
Market internals were mixed on Friday. Volume fell on the NYSE by 2.9% but rose on the Nasdaq by 4.3%. However, declining volume easily topped advancing volume on both exchanges. By the close, the spread ratio on the Nasdaq stood at a hefty -8.7 to 1 and on the NYSE at -5.9 to 1. The NYSE escaped distribution but the Nasdaq fell prey to heavier selling. However, since we already have a sell signal in the broad market, there’s little need to track distribution days, other than as an indication of the strength of any moves lower.
Now that we’ve seen heavy selling pressure for two days, let’s do an updated review of key support levels on the Nasdaq and S&P 500 Index (INDEXSP:.INX):
Price action was horrible on the S&P 500 on Friday, as it gapped down, trended steadily lower intraday, then closed at the low of the session. In the May 2 issue of The Wagner Daily, we said, “If the S&P loses support of its two-day low (1,394 at that time) and doesn’t recover quickly, we anticipate a retest of the 1,357 swing low in the near-term.” With the index now less than 1% above that 1,357 level, our May 2 projection seems pretty likely to occur. If the 1,357 level fails to hold, next significant support is around the 1,340 area. However, we would not be surprised to see a substantial bounce off either or both of these support levels. On the chart below, notice that the S&P has now cracked support of its long-term uptrend line, which should now serve as resistance on any subsequent rally attempt:
Also in our May 2 newsletter, we said of the Nasdaq Composite, “If the Nasdaq is unable to hold key intermediate-term support of its 50-day MA (3,025), it will likely retest the April 23rd swing low of 2,946 as its next move.” With last Friday’s closing price of 2,956, the index is now just 0.3% above that level, so the Nasdaq will probably test that level in today’s session. An “undercut” of the 2,946 area (April 23 swing low) could easily result in a bounce on the Nasdaq. Additionally, unlike the S&P 500, the Nasdaq Composite is still holding above its long-term uptrend line, which coincides with the March 6th low of the 2,900 area. Naturally, we would expect the Nasdaq to find major support at this level:
By cutting half of our long exposure early last week and closing the rest of our long exposure on Friday’s open, we were able to limit the losses on open positions to just below the breakeven mark. When the market turns sour, we prefer to lock in gains on winners (if we have any) and raise stops (or sell right away) to limit losses and protect trading capital. Losses are impossible to avoid in this business, but our market timing model typically enables us to step aside with very little damage done to the bottom line, and that is fine with us. Moreover, both our inversely correlated (short ETF) positions, $SOXS and $EEV, zoomed sharply higher as the broad market sold off last Friday. As such, we are modifying the target prices on $SOXS and $EEV, and are also trailing the stop price higher on $EEV only. Subscribers should note updated trade details in the “Open Positions” section of this newsletter below.
If there was indecision going into last Friday’s session, one benefit of the sharp sell-off and breakdowns below key technical levels is that we now have a clear sell signal in the market. As trend following swing traders, a trend in either direction is always preferable to no trend in the market. Still, we expect to see increased volatility in the market and will be looking to take profits quicker than usual, particularly on leveraged ETFs, and into any market gaps. Despite the strength of the recent selling, now is probably NOT an ideal time to get greedy on the short side of the market, since we are quickly approaching major support levels on the major indices.