Morpheus Trading: Stocks were hit hard yesterday, with most major averages dropping 1.0% or more on higher volume. In hindsight, Wednesday’s distribution confirms that there was churning (bearish stalling action at the highs) earlier in the week in the S&P 500 and NASDAQ Composite.
Wednesday’s selling does put quite a bit of pressure on the current rally, but the uptrend remains intact in the S&P 500 and NASDAQ Composite. The small and mid-cap averages are relatively weak and in danger of losing the 50-day moving average, which is our line in the sand during a bull market.
What would it take for our timing model to produce a sell signal? A clear sell signal would be generated if most major averages and leading stocks were both under heavy distribution, and major averages were below the 50-day moving average.
We have one new setup on today’s Wagner Daily watchlist, and it is a potential short setup in silver. Rather than shorting iShares Silver Trust ($SLV), we are looking to buy the inversely correlated ProShares UltraShort Silver ($ZSL) on a pullback.
The weekly chart below details the sharp rally off the lows at the beginning of 2013. $ZSL ran out of gas around $110 and pulled back into the 40-week MA. After two months of chopping around, $ZSL finally broke the downtrend line of the consolidation and rallied, stopping just shy of $100:
Currently $ZSL is in pullback mode, and we are looking for a potential long entry on weakness at or near support of the 10 and 40-week moving averages.
The daily chart shows the gap down below support at $86 this week. Notice how all three major averages (20, 50, 200) are now trending higher and in proper order. The 50-day MA has crossed back above the 200-day MA as well.