The Wagner Daily - September 23, 2011
Concise technical analysis and picks of the leading global ETFs
Thursday was a miserable day for Wall Street as bears dominated the market on heavy trade. The only bright note is that stocks did end off session lows. All five major indices closed in the red as the market saw broad based selling. The Dow Jones Industrial Average plunged by 3.5% while the Nasdaq, S&P 500 and small-cap Russell 2000 all slid 3.2%. The S&P MidCap 400 was the only major index that did not eclipse the three percent loss mark as it fell by 2.9%.
For a second time in as many days internals were decisively bearish. Volume spiked by a whopping 35% on the Nasdaq and 39% on the NYSE. Declining volume overwhelmed advancing volume by a ratio of 19.6 to 1 on the Big Board and 12.0 to 1 on the Nasdaq. Given the massive gap down and heavy trade, it is obvious that institutional players were actively involved in the selling. Thursday is easily classified as a distribution day for the broad market as no sectors were spared the carnage.
We exited all of our positions yesterday for sizeable gains. We closed SRS, SMN and EUO to post gains of 15%, 20% and 6.5% respectively. Below we have provided charts of SRS, SMN and EUO that show both the entry and exit prices in each of these trades. Notice that for each trade we patiently waited for legitimate price triggers to enter and we exited all of the trades into the strength of a gap up.
The NYSE has been a very reliable leading indicator in this bear market. The charts below provide some insight into what we expect from the market over the next several days. Only time will tell if our observations are correct.
In order for the market to stabilize and set up the next rally it is likely that we need a capitulation day of 4-5% across all major indices. Typically capitulation involves a massive spike in volume, 800-1000 stocks down four percent or more, 90% down volume, 90% of stocks down on the day and relentless selling into the close. The capitulation day should then be followed by a massive reversal day which catches market bulls off guard. Typically, only with this type of price action, can a bottom be put in 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: firstname.lastname@example.org.
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