The Wagner Daily - November 17, 2010
Concise technical analysis and picks of the leading global ETFs
Tuesday's session saw all major indices decline sharply on big volume. At the open, stocks gapped down, sold off until 11:30 am, and spent the remainder of the session consolidating at the lows. Over 95% of all stocks on the S&P 500 closed lower on Tuesday. The small-cap Russell 2000 was hit the hardest, as it fell 2% yesterday. Close behind were the S&P MidCap 400 and the Nasdaq. Each plummeted 1.8%. The Dow Jones Industrial Average and the S&P 500 both shed 1.6% by the close. Selling throughout the day was heavy.
Volume increased dramatically in Tuesday's session. Nasdaq turnover jumped 19%, while NYSE volume increased by an astounding 51%. Declining volume decidedly outpaced advancing volume by a ratio of 13.3 to 1 on the NYSE, and 7.8 to 1 on the Nasdaq. Tuesday's trading clearly brought distribution to the markets. Institutions sold heavily from the opening bell into the close.
We have been stating for several weeks there were converging signs of a market reversal. Given the sharp selloff yesterday, it is wise to take a step back from the market. Based on our trading methodology, during sudden market reversals it is not uncommon for the majority setups to be nullified. Further, the combination of options expiration week and increased volatility, suggest that the most prudent course of action is to carefully evaluate before rushing into trades. The markets have to be given time to "settle in" and stabilize. Because of the relentless selling pressure, much of the leadership is being rung out of the market. As a rule, we don't trade against the trend, but during sharp counter trend moves, reversal trades do provide some short term opportunity.
During the frenzy of a sharp round of selling, it is easy to get caught up in the emotion of the moment. Numerous gaps in a short period of time can result in confusion as to the next level of support. In the midst of broad based selling, it often feels like there are no support levels. This is particularly true when viewing the market solely through the lens of the daily chart. During significant corrections, evaluating the market from a different time period can be very useful in sorting out where things are headed. It helps provide clarity to the "whipsaw" action on the daily timeframe. Below, are the daily and weekly charts of the iShares MSCI Switzerland Index (NYSEARCA:EWL). The comparison of this ETF across both time periods offers a good example of the usefulness of this technique.
Although the evaluation of multiple timeframes can provide perspective, it is not recommended to use this analysis to ignore stops. Further, during severe market moves (up or down) existing support and resistance levels can quickly be breached.
Despite the heavy selling, the uptrend remains intact. Until the trend is broken, we will continue to scan for trades of strong ETFs pulling back into support.
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: firstname.lastname@example.org.
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