Friday was a very tough day on Wall Street. Stocks were down dramatically across the board and all five major indices closed lower. The bears snatched control of the market at the open, and held on firmly into the close. The Nasdaq and the small-cap Russell 2000 led the decline. Both indices plummeted by 2.4%. The S&P MidCap 400, the S&P 500 and the Dow Jones Industrial Average dropped 1.9%, 1.8% and 1.4% respectively. It is noteworthy that the Dow Jones Transportation Average ($DJT) underperformed the entire market. The $DJT plummeted 2.7% on Friday.
Market internals were decidedly bearish and pointed clearly toward institutional selling. Volume was heavy on both the NYSE and Nasdaq. Turnover jumped on the Big Board by 34% and on the Nasdaq by 18%. Declining volume overwhelmed advancing volume by a ratio of 7 to 1 on the NYSE and 8 to 1 on the Nasdaq. Distribution was broad based and relentless.
We made the decision to exit our position in PIZ due to serious weakness among emerging market ETFs. In Friday’s newsletter we stated, “The iShares S&P Latin America 40 Index (NYSE:ILF) is close to losing major support. Yesterday, on a big spike in volume ILF opened near the session high and closed near the session low. A break below Thursday’s low of $51.97 provides a potential short trigger for this ETF”. ILF hit its short trigger early on Friday and we entered the trade. For the second consecutive day ILF sold off sharply on 3 times its average daily volume. We expect further selling in this ETF, but it does have support near $50.00. We would not be surprised to see ILF hit this key mark and reverse quickly. Generally these reversals are short lived for ETFs that have demonstrated relative weakness during the selloff.
The Dow Jones Transportation Average ($DJT) often serves as a good leading indicator for market reversals. Prior to yesterday’s distribution day, the $DJT had already begun to break down. While the Dow Jones Industrial Average was setting new highs, $DJT saw a sharp selloff on January 19th. Seven days later the Dow cracked (See Charts Below).
The SPDR KBW Bank ETF (NYSE:KBE) is clinging to support at the neckline of a head and shoulders like formation. A move below the January 25th Low of $25.96 is a potential short trigger for this ETF. We are placing KBE on the watchlist. Our subscribers can find trade details in the watchlist segment of this newsletter. For those of you unable to short KBE, an alternative trade is to go long the inverse ProShares UltraShort Financials ETF (SKF).
The iShares MSCI Chile Investable Market Index (NYSE:ECH) closed below its three week low on Friday. A drop back below yesterday’s low of $71.10 should result in further downside for ECH. An alternative short entry would be a rally back into resistance near $72.00.
After a massive distribution day like we witnessed on Friday, it is often wise to wait for a bounce to enter a short position. This market has not completely broken down, as there are many support levels still intact. After a big market reversal, we prefer to short weak ETFs into a bounce rather than chase them on the way down.
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]