Stocks got off to a rough start to begin the fourth quarter, logging heavy losses across the board. There would be no repeat of Wednesday’s session, where broad market averages reversed sharply to the upside after a steep morning selloff. The selling pressure was persistent all session long, confirmed by ugly internals and strong volume. All major indices sold off in to the close and finished at the lows of the day. The small-cap Russell 2000 fell 3.4%. The Nasdaq Composite and S&P Midcap 400 each lost 3.1%. The S&P 500 and Dow Jones Industrial Average sank 2.5% and 2.1% respectively.
Turnover was mixed yesterday. Nasdaq volume checked in at 3% higher, but the 2% decline in volume on the NYSE prevented it from suffering a fifth day of distribution. When a major average hits the five or six day count on distribution days, the odds begin to favor a significant correction. As it stands now, we are simply in pullback mode, with the expectation of the bullish trend to resume once this pullback runs its course.
The Semiconductor HOLDRs ETF (SMH) broke down below the 50-day MA on heavy volume after failing to breakout from a tight, five-week base. Weakness in this sector will act as a drag on the tech heavy Nasdaq Composite. We see support from a prior low around 24.00. If this level does not hold then we could see a pullback to test the low of the 7/15 gap up.
Per Thursday’s Intraday Trade Alert, we established a short position in the Market Vectors Agribusiness ETF (MOO), shown on the chart below:
MOO showed relative weakness last week by breaking support of the August highs ahead of the S&P 500. While the S&P 500 attempted to bounce higher on 9/28 and 9/29, MOO remained in a very tight range, sandwiched between the 20-day and 50-day MA’s. We entered below the 50-day MA and the 9/25 low.
On Wednesday we scratched our buy entry in TAN off support of the 20-day EMA due to the weak price action on the opening gap up.
We cut the position right away so there was no damage done. Let’s see whether or not Thursday’s breakdown below the 50-day MA was just a washout bar or the beginning of a bigger move down to the 200-day MA. A breakout above the downtrend line next week is a potential buy signal.
With the S&P 500 clearly breaking through support of the August highs and the 20-day EMA, the short-term trend is reversing. We expect a pullback to or undercut of the 50-day MA within the next few days. Short-term swing traders should avoid entering new long positions until the market settles down. The intermediate-term trend is still up, so now would be a good time to create a watchlist of bullish ETF patterns that are coming in to logical areas of support.
Open ETF positions:
Long – DGP, UNG, DBB, FCG
Short – MOO, DUG (an inversely correlated ETF we’re long)
NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.
Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner’s new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is 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. He is also a frequent guest speaker at various trading and financial conferences around the world.
For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.
