Yesterday was an interesting session of clear broad market divergence as the S&P and Nasdaq went their separate ways. The S&P 500 digested its recent gains by trading in a narrow, sideways range before finishing the day 0.2% higher. The Nasdaq Composite, however, began to sell off at mid-day and trended lower throughout the entire afternoon. The index closed with a 0.5% loss and at its intraday low. Like the S&P 500, the Dow Jones acted pretty well and gained 0.4%, but the small-cap Russell 2000 and S&P Midcap 400 indices both advanced only 0.1%.
Divergence between the S&P and Nasdaq was evident not only in price, but in yesterday's volume patterns and market internals as well. Total volume in the NYSE was 3% higher than the previous day's level, giving the S&P 500 its third straight "accumulation day." Market internals in the NYSE were mildly positive, as advancing volume exceeded declining volume by a ratio of just below 3 to 2. But a look "under the hood" at yesterday's performance in the Nasdaq shows a completely opposite picture. In the Nasdaq, total volume leapt 14% higher, but that was actually bearish because the Nasdaq closed 0.5% lower. Worse is that the Nasdaq's volume was much higher than in any one of the four consecutive "up" days that preceded yesterday's selloff. Yesterday's volume in the Nasdaq was the highest since March 3, which ironically was the day the Nasdaq failed to break out above its 2,315 resistance level and sold off in the afternoon.
In yesterday's Wagner Daily, we discussed the importance of the Nasdaq's upcoming test of resistance at the 2,315 level. Not surprisingly, the Nasdaq probed above that level and up to the March 3 high on an intraday basis, but it sold off in the afternoon and closed at 2,299. The Nasdaq also finished near the previous day's low, as opposed to the S&P 500 which managed to close above the prior day's high. Take a look:
As you can see, the red dotted line on the chart above marks resistance of the 2,315 level, while the solid blue line illustrates resistance of the March 3 high ten points above that level. Looking at the daily volume bars on the bottom of the chart, notice also how yesterday's volume was the highest since that bearish reversal day on March 3. This tells us that institutions are continuing to sell into strength in the Nasdaq.
Also in yesterday's newsletter, we suggested you keep an eye on the Semiconductor Index
(SOX | Quote | Chart | News | PowerRating) because it would likely to be the first index to fall if the Nasdaq failed to break out. Agreeably, that is exactly what happened in the afternoon. Although the Nasdaq fell only 0.5%, the SOX plummeted to close 3.2% lower! The extreme relative weakness also caused the sector to give back all of its gains from the prior two days and close at its lowest price since January 3:
As you can see, the SOX does not really have any more support until the 200-day moving average. As such, we now anticipate that the SOX will test that 200-MA within the next few days. To capitalize on the relative weakness in the SOX, we listed
(IGW | Quote | Chart | News | PowerRating) (iShares Semiconductor) as a short setup for regular subscribers in yesterday's newsletter. The reason for the short setup was that we merely anticipated the long period of prior price consolidation in IGW would now act as overhead resistance. As of the close, the trade was showing an unrealized gain of exactly one point because IGW follows the SOX rather closely. Our downside target on IGW is its 200-day moving average, about 5% below yesterday's closing price.
In addition to the Nasdaq Composite, both the Russell 2000 and S&P Midcap 400 indices reversed after failing to break out above pivotal resistance levels. Specifically, both indices traded to new all-time highs on an intraday basis, but reversed to close below their prior highs. Below are the daily charts of
(IWM | Quote | Chart | News | PowerRating) (iShares Russell 2000) and (MDY | Quote | Chart | News | PowerRating) (S&P Midcap SPDR.
As you may recall, we pointed out two days ago that IWM was forming the right shoulder of a "head and shoulders" chart pattern. That bearish pattern would have been invalidated if IWM had broken out above the "head," but so far it has not. Notice also that MDY is also forming the right shoulder of a "head and shoulders" pattern, although the top of the shoulder is very close to the head.
Yesterday's broad market divergence complicates the technical picture even more, but confirms our original reasons for moving to a neutral short-term bias. Clearly, the tech stocks are sick. Just take a quick look at the technical damage on the charts of Google, Apple, or nearly any other former high flyer in the tech arena. Because of this, we feel that shorting is relatively low risk if you confine your short selling operations to the weakest sectors such as the Semis. In the broad market, you may also consider shorting IWM and/or MDY if they remain unable to break out to new highs. However, just be sure to keep a tight stop in place over the highs. Obviously, we do not advocate shorting
(SPY | Quote | Chart | News | PowerRating) or (DIA | Quote | Chart | News | PowerRating) because both the S&P and Dow are acting much better than the rest of the market and have no overhead supply. Should you go long the S&P or Dow-type stocks and ETFs, tight stops are equally important due to the weakness in the Nasdaq.
Open ETF positions:
Short IGW (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)
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 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 or to learn about Deron's other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.
