Yesterday was a difficult day on Wall Street. Stocks were down sharply but on mixed trade. Price action was decidedly bearish as all five major indices closed in the red by more than 1%. The small-cap Russell 2000 (NYSE:IWM) led the plummet as it fell 1.9% yesterday. The Nasdaq (NASDAQ:QQQ) and the S&P MidCap 400 did not fare much better as both shed 1.6%. By the closing bell the S&P 500 (NYSE:SPY) and the Dow Jones Industrial Average (NYSE:DIA) lost 1.2% and 1.1% respectively.
Market internals were not good but did end the day mixed. Volume on the Big Board fell almost 14% while it finished higher on the Nasdaq by 1.2%. Declining volume overwhelmed advancing volume on both exchanges. The session ended with the declining volume to advancing volume ratio at 9 to 1 on the NYSE and 4.5 to 1 on the Nasdaq. Bears clearly had command of this technical indicator. Nonetheless, we cannot classify Monday as a distribution day for the broad market due to weak trade on the NYSE. The Nasdaq did however experience distribution yesterday.
Both our long position in (NYSE:UUP) and our short position in IWM performed well yesterday. We sold approximately two thirds of our position in UUP into strength and covered two thirds of our position in IWM into weakness. Both trades netted solid gains. We felt it was wise to take some profits in both trades due to the size of yesterday’s gap down in the market. Our subscribing members should refer to the open positions and closed position segments of the newsletter for full trade details.
The PowerShares DB Agricultural ETF (NYSE:DBA) is once again testing major support near $31.95. Yesterday was the third time in as many months that this ETF has tested this key mark. We see two potential shorting opportunities for this ETF. The first possible entry would be on a rally back into resistance at the 20-day EMA ($32.90). The second potential entry would be a move by DBA back below support at $31.95. From a risk/reward standpoint we consider the first setup as the better of the two.
The PowerShares DB Crude Oil Double Short ETF (NYSE:DTO) has been consolidating for the past 13 days as it has set a sequence of higher lows. A quick glance at the hourly chart of DTO also shows that each pullback has “tightened” as this ETF attempts to move back above resistance just above $49.00. A volume fueled move above yesterday’s high of $49.23 could provide a long entry trigger for DTO. We are watching this pattern closely for a potential buying opportunity in this ETF.
The market continues to struggle. If not for light trade on the NYSE, yesterday could have been a complete disaster for the market. Long setups have been virtually nonexistent in our daily scans. Yesterday’s gap down places even more weight on an already heavy market. If we see a significant distribution day tomorrow, the potential increases for a sizeable correction in the broad market. Nonetheless, caution on the short side is warranted given the extended nature of the market.
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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