Stocks reversed sharply on Wednesday to close lower, but on mixed trade. The major indices all closed in the red, as both the DJIA (NYSEArca:DIA) and the small-cap Russell 2000 (NYSEArca:IWM) shed 0.8%. Both the Nasdaq (NASDAQ:QQQ) and the S&P 500 (NYSEArca:SPY) fell 0.5%, while the S&P MidCap 400 lost 0.3% on the session. Among the few sectors showing relative strength on Wednesday were gold mining, coal, wireless communications and insurance. Weaker sectors included transportation, oil services, real estate, retail and defense.
Despite the sharp intraday reversal, market internals finished mixed on Wednesday. Volume surged on the NYSE by 8.8% but fell on the Nasdaq by just over 4.0%. Declining volume topped advancing volume on the NYSE by a ratio of 1.9 to 1 and on the Nasdaq by a ratio of 1.3 to 1. The NYSE posted its first distribution day in a month. The Nasdaq escaped distribution because its selloff came on lighter volume.
Yesterday, the S&P Select Sector Technology SPDR ETF (NYSEArca:XLK) formed a bearish reversal candle on an increase in volume. Given this price and volume action it appears that XLK may take a rest from the recent rally. A pullback by this ETF into support of its uptrend line and 20-day EMA could provide a potential buying opportunity.
Over the past two weeks, the ProShares UltraShort Basic Materials ETF (NYSEArca:SMN) has based out and broken above a multi-month downtrend line. Yesterday, for the second day in a row, SMN attempted to move above resistance of its 20-day EMA. A volume fueled move back above this key mark could provide a buying opportunity in this inverse ETF. Although we are not inclined to do much shorting in a bull market, basic materials have recently shown relative weakness to the broad market. Accordingly, an inverse ETF such as SMN could provide a quick opportunity to take on short exposure.
Even though bears wrestled control of the market yesterday, we avoided a distribution day on the Nasdaq. Unless we begin to see numerous distribution days over a short timeframe, we view any selling as an opportunity to purchase the strongest ETFs near support levels.
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 protected]