Market internals ended the day mixed. Volume fell by 10.7% on the NYSE and 6.7% on the Nasdaq. Declining volume continued its command over advancing volume on Monday. The spread ratio ended the session in favor of declining volume by a ratio of 1.1 to 1 on the NYSE and 2 to 1 on the Nasdaq. The combination of mixed price action and mixed internals points to a lack of institutional involvement in Monday’s session.
Our open short position in TUR acted well yesterday as it gapped up in the morning but sold off for most of the session. By the closing bell TUR was trading in the lower third of the day’s range. A move below Monday’s low of $61.75 will likely attract a flood of short selling activity.
Yesterday the Nasdaq Composite ($COMPX) hit a milestone as it touched its 200-day moving average for the first time since September 1, 2010. Rarely will an index lose support of its 200-day MA without first testing this key mark several times. Consequently, we anticipate that the Nasdaq will undercut the 200-day MA sometime over the next 2 or 3 sessions and then move higher for several days. Should the market bounce, we will be looking for ETFs that are exhibiting relative weakness during the rally as they should present the best shorting opportunities. We do however suggest caution on the short side (NYSE:SDS) of the market over the next several days. As long as the Nasdaq holds the 200-day MA and its two year uptrend line, the past 9 days of carnage will only be considered a market correction. However, if the Nasdaq, DJIA and S&P 500 all lose support of their 200-day moving averages, the market will likely undergo a severe trend reversal.
The iShares All Peru Capped Index (NYSE:EPU) has been consolidating near resistance of a recently formed gap, its declining 20-day EMA and declining 50-day MA. EPU could offer a shorting opportunity with a rally into these key moving averages or a move below the three day low of $40.27. We will be closely monitoring this ETF for a possible short entry.
Although the market has been showing subtle signs of recovering, every bounce has been met with resistance. For the moment, buyers do not appear willing to enter the market. Given the negative overtone in the market the question likely becomes will we even see a bounce before the broad market (S&P 500) tests the 200-day MA? Nonetheless, we are not interested in taking on new short positions after nine straight days of selling pressure.
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]
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