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NOTE: Please click on the charts below to enlarge them if they do not appear clearly.

Stocks capped an ugly week on a negative note last Friday, as the major indices slid deeper into the red. The broad market traded in a sideways range throughout the morning, fell to new intraday lows in the early afternoon, then recovered slightly in the final two hours of trading.  The Nasdaq Composite, down 1.2% at its worst level of the day, reversed to close only 0.3% lower.  The S&P 500 similarly lost 0.4%, as the Dow Jones Industrial Average lagged behind again with a 0.9% closing loss.  The small-cap Russell 2000 was unchanged, but the S&P Midcap 400 fell 0.4%.  The S&P 500 shed 3.0%, the Nasdaq Composite 3.8%, and the Dow Jones Industrial Average 4.2%.   

Total volume in the NYSE increased 1% above the previous day's level, while volume in the Nasdaq ticked 2% higher.  Market internals were negative, but not by a wide margin.  In both exchanges, declining volume exceeded advancing volume by a margin of approximately 3 to 2.

Going into the last day of June and the second calendar quarter, the S&P 500 is showing a month-to-date loss of 8.7%.  If the index were to close flat today, it would be the worst monthly loss since September of 2002.  The S&P 500 tumbled 11% that month, which also happened to precede the bottom of the nasty 2000 to 2002 bear market by just one month.  Will this month's similar loss precede a major bottom of the current downtrend as well?  That depends on whether or not the S&P 500 holds key support of its 38.2% Fibonacci retracement from its October 2002 low to October 2007 high.  Shown on the long-term monthly chart of the S&P 500, notice how the index closed the week just above its 38.2% Fibonacci retracement (1,267):

Although the S&P 500 is at support of its long-term 38.2% Fibonacci retracement, it is not the first time it has done so this year.  Notice how the index already bounced off this support level back in both January and March of this year.  While the March test of support was representative of a double bottom pattern, each subsequent test of this level unfortunately weakens the support and increases the odds of an eventual breakdown below it.  As such, we're not feeling too confident about the prospect of the S&P 500 forming a major bottom right here.  If the index indeed cracks the 38.2% Fibonacci retracement, expect the S&P 500 to find its next major support near the 50% Fibonacci retracement level of 1,172, which is 8.3% below its current price.

The silver lining on the storm clouds is that the daily chart of the S&P 500 provides a couple reasons why the index may at least bounce in the near-term.  First, there is support of the March 2008 closing low, which the S&P 500 bounced off of on Friday, and finished above by just a couple points.  Further, the S&P 500 has now fallen below lower boundary support of its intermediate-term downtrending channel. This means it is technically "oversold."  On the daily chart below, the descending red lines illustrate the current downtrending channel. The dashed blue horizontal line marks support of the March 2008 closing low:

The combination of the March 2008 closing low of 1,273, and extension beyond the lower boundary of the downtrending channel, provides a valid excuse for traders to cover short positions and begin testing the water on the long side of the market.  However, there are two things to consider here.  First is that the Dow Jones Industrial Average has already sliced well below its March 2008 low.  With the Dow now sitting at a fresh 52-week low, overall momentum in the blue-chip index favors the downside.  This undoubtedly has a negative psychological effect on investors in general.  Second, realize there is no guarantee the S&P 500 will snap back from "oversold" levels anytime soon. In strongly trending markets, it's not unusual for an index to remain below the lower boundary support (in downtrends) or upper boundary resistance (in uptrends) for weeks at a time before reverting to the mean.

Countering the precarious states of the S&P 500 and Dow Jones Industrial Average is the relatively strong Nasdaq Composite, which is still more than 6% above its March 2008 low.  Last Friday's intraday reversal pattern in the Nasdaq, on higher volume, means we should see buying interest in the Nasdaq over the next few days.  If stocks begin to stabilize overall, expect the Nasdaq to show leadership amongst the main stock market indexes.  The same is true of the lesser-known, but equally significant, small and mid-cap indexes.  Both the Russell 2000 and S&P Midcap 400 indices have exhibited relative strength throughout this month's sell-off.  When the broad market rallies again (yes, it eventually will), small and mid-cap issues within the Nasdaq may provide the most upside potential and least downside risk.

There are very few ETF trade setups we like for potential entry right now, both on the short and long side of the market.  On the short side, we simply don't like the risk/reward level of entering new shorts here.  We realize that "oversold" markets can continue to become even more "oversold" before bouncing, but the inevitable bounces from such conditions are too vicious to justify entries at such "oversold" levels.  There is, however, a possible exception for daytraders, who should continue to initiate short sales as long as intraday momentum remains weak.  Banking and Securities Broker-Dealers are clearly among the weakest sectors for intraday short selling into bounces, though their potential for short squeezes are also great. 

On the long side, we're really liking the newfound strength in the gold and silver sector.  In last Friday's commentary, we wrote about the reasons the current buying interest may be sustainable, unlike numerous rally attempts that have failed in recent months.  The sector went on to build on the previous day's gains in Friday's session, giving us more confidence in the bullish scenario of gold and silver.  Of the various ETFs in the sector, we like both Market Vectors Gold Miners (GDX) and StreetTRACKS Gold Trust (GLD) the best.  iShares Silver Trust (SLV) is exhibiting relative weakness. Both GDX and GLD could be bought with relatively low risk on pullbacks to their 20-period exponential moving averages on their hourly charts.  The oil-related ETFs continue to hold near their highs, but have become choppy and indecisive.  They are probably best left alone for the "late to the party Charlies" to fight it out.

Open ETF positions:


Long - (none)

Short - SLX




NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices.  Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.





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.  Wagner is currently working on this third book, scheduled for publication in early 2008.





For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.

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