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S&P 500 back to its 200-day MA - May 19, 2010

|Includes: IWM, iShares U.S. Basic Materials ETF (IYM)

Momentum from Monday's bullish intraday reversal abruptly fizzled out yesterday, as stocks resumed the bearish trend from the latter half of the previous week. Although the major indices opened higher, traders promptly sold into strength of the opening gap, sending the broad market into a steady downtrend that persisted through the entire session. The Dow Jones Industrial Average slid 1.1%, the S&P 500 1.4%, and the Nasdaq Composite 1.6%. The small-cap Russell 2000 and S&P Midcap 400 indices swooned 1.8% and 1.5% respectively. All the major indices finished near their intraday lows, in the vicinity of the prior day's lows as well.

Total volume in the NYSE rose 5% above the previous day's level, while volume in the Nasdaq ticked 3% higher. Turnover in the NYSE was slightly above average, but trading in the Nasdaq remained below its 50-day average level. Market internals were rather ugly. In the NYSE, declining volume trounced advancing volume by a margin of 8 to 1. The Nasdaq adv/dec volume ratio was negative by 6 to 1. Such negative margins indicate the selling was broad-based, not just confined to a few sectors that weighed on the market.

Last week, after the S&P 500 bounced into resistance of its 20 and 50-day moving averages, we said the amount of overhead supply and technical price resistance in the broad market would likely cause the major indices to decline and test the area of their May 6 lows before they attempted to reset themselves and form a significant bottom. With yesterday's losses, most of the main stock market indexes are now on their way to doing so. However, barring another insane, intraday plunge such as the one traders witnessed on May 6, the major indices may be more likely to find support near their 200-day moving averages, rather than their ultimate lows of May 6. On the daily chart of the S&P 500 below, we've highlighted the next major area of support for the index:

SPX

On May 6, when the main stock market indexes nosedived approximately 10% intraday, the 200-day moving average did nothing in the way of providing support to the S&P 500. However, that was quite an anomaly, one in which there is still no clear consensus of the reasons behind the incredible plunge. The following day, when the dust had somewhat settled, the S&P 500 registered another session of losses, but notice the 200-day moving average provided support that coincided with that day's intraday low (circled in pink on the chart above). We feel there's a good chance that will happen again, though an intraday "undercut" of 1 to 2% below the actual 200-day moving average would not be surprising.

Our two short positions (IYM and IWM) are each showing an unrealized gain. But due to support of the 200-day MA on the S&P 500, we're not planning on holding them much longer. If we see another round of substantial weakness in today's session, we will probably cover both of them into weakness, locking in the profits. Over the next few weeks, we would then look for signs of stabilization near the 200-day MA and/or prior lows. If bases of consolidation develop and relative strength emerges, we'll dip a toe in the water on the long side of the market. Nevertheless, it's way too early for that right now. Though we just entered two new long positions (SLV and UNG), both have a low correlation to the direction of the broad market. As such, we're not overly concerned about them being affected by further near-term weakness in the major indices.


Open ETF positions:

Long - SLV, UNG
Short (including inversely correlated "short ETFs") - IYM, IWM

 
The commentary above is an abbreviated version of a daily ETF trading newsletter, The Wagner Daily. Regular subscribers receive daily updates on all open positions, as well as new ETF trade setups with detailed trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or text message, on as-needed basis. For your free 1-month trial to the full version of The Wagner Daily, or to learn about our other services, please visit morpheustrading.com.

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 deron@morpheustrading.com.



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Disclosure: Short IYM, Short IWM, Long UNG, Long SLV