The Wagner Daily - December 8, 2010
Concise technical analysis and picks of the leading global ETFs
Tuesday's price and volume action left a bearish aftertaste in what began as a bullish feast. The major indices gapped up sharply at the open, but quickly reversed and took back most of the opening move in the morning session. At 12:30 buyers stepped in and it appeared that the gap might hold. But at the 2:30 reversal period the bears took control as volume spiked. Despite the heavy afternoon selling, four of the five major indices managed to close flat, with the small-cap Russell 2000 being the only index to post a noteworthy gain. It is important to note that yesterday's massive volume on the NYSE was, in large part, the result of over 2 billion shares trading hands in Citibank.
Because of the wild activity in Citibank, it is difficult to make a clear assessment of the market internals. Turnover on Tuesday was massive on the NYSE. Day over day the volume traded on this index rose by an astonishing 70%. Nasdaq volume was also heavy, as it climbed by an impressive 19% on Tuesday. Because of the overwhelming volume in Citibank, we are inclined to analyze the broad market through the eyes of the Nasdaq. And, for the most part, the Nasdaq performed poorly. In yesterday's session, the advancing volume to declining volume ratio ended at breakeven on the Nasdaq, while up volume outpaced down volume by a factor of 1.6 to 1 on the NYSE.
As a rule, we generally avoid the news. When an anomaly occurs we will investigate in order to better assess the situation. But, at the end of the day, we make our decisions based upon our time tested technical trading philosophy. As such, other than natural human curiosity to find out where the volume spike originated, we have no interest in attempting to analyze the rationale behind or implications of the event via the mass media. In the midst of such dramatic events we rely on the charts. That's why we are technical traders. The charts tell us what we need to know.
So what did the charts tell us yesterday? They told us that bears controlled the entire day's price action subsequent to the opening gap. Depending on the index, what we witnessed was a false breakout and a return to support (Nasdaq and S&P 500) or the trading range (DJIA). Below are charts of the Dow, the SPY and the Nasdaq. Without the need of headlines or esoteric rhetoric, these simple pictures speak a thousand words.
Ultimately, markets do whatever they do, news sources report whatever they report, and experts have whatever opinions they have. There's never a shortage of explanations about movements in the market. But, we have rules that govern our trading, which we can choose to follow or choose to ignore. We cannot control the market, the news or other's opinions, but we can control our own trading behavior.
The iPath India Index ETN (NYSEARCA:INP), has rallied back into resistance after bouncing off a long term support level on November 26th. This date also marks the first "lower-low" set by INP since 2009. This suggests that INP could be in the midst of a trend reversal or possibly range bound. Over a several year time frame INP still exhibits strength, but over the past several weeks it has significantly underperformed the market and broke below a key support level ($76.30). If the market corrects here, INP could once again test the $70.00 mark. A drop below the December 3rd low of $74.80 provides a possible short trigger for INP.
Should the market follow through on yesterday's bearish reversal, we are likely to tighten our stops in those positions exhibiting relative weakness. When faced with volatile market conditions it is wise to proactively re-evaluate trades and adjust stops accordingly.
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@example.com.
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