Near-term Bounce Coming Soon?

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

After gapping lower on the open, stocks quickly reversed into positive territory last Friday morning, but the bears resumed control in the afternoon, sending the major indices down to new session lows. Blue-chip stocks showed relative weakness for a change, causing the Dow to fall 1.2%. The S&P 500 lost 0.8%, as both the Nasdaq Composite and small-cap Russell 2000 slipped 0.4%. The S&P Midcap 400 shed 1.0%. A bounce in the final hour enabled the main stock market indexes to settle above their worst levels of the day, but they still closed near their lows of the week.

Turnover rose in both exchanges, indicating the presence of institutional selling. Total volume in the NYSE increased 7% above the previous day's level, while the Nasdaq volume similarly ticked 8% higher. Volume levels in both the NYSE and Nasdaq moved back above 50-day average levels, but not by a wide enough margin to declare a high volume capitulation. In downtrending markets, near to intermediate-term bottoms are often marked by the large losses and sharply higher turnover that occurs when the last of the bulls finally "throw in the towel" and capitulate to selling. We haven't seen that yet.

The S&P 500 followed the Nasdaq by setting a new 52-week closing low last Thursday. On Friday, the Dow joined the S&P 500 by falling to a fresh 52-week closing low. With each of the "big 3" main stock market indexes sitting at new 52-week lows, the broad market may be setting up to begin its third leg down of the primary downtrend from the October 2007 high. The intraday lows from January 22 and 23 of this year may still provide a bit of price support, but one must look to the longer-term weekly and monthly charts to find the next major levels of support. As illustrated last week, the 50% Fibonacci retracement from the October 2002 lows to the October 2007 highs are the next key areas of support if the January lows are broken. To refresh your mind, here's the S&P 500 monthly chart:

If I tell the average non-technical investor that the S&P 500 could easily fall another 9%, down to the 1,172 area, they may find it hard to believe. But when looking at the "big picture" of the S&P 500 on a monthly chart, a correction down to the 1,172 area only represents a 50% retracement of the monstrous five-year bull run that almost doubled the value of the S&P 500 from its October 2002 low. If that happens, we do not yet have an opinion as to whether or not a 50% S&P 500 retracement would mark a definite bottom in the broad market. However, one thing we really don't like about the monthly chart of the S&P 500 is that the index ran out of gas right at resistance of its all-time high from the year 2000 (circled in pink). This means the S&P now has a bearish "double top" formation in place. Unfortunately, we know from experience that "double tops" on long-term monthly charts often lead to severe losses that exceed 50% retracements.

The good news is that downside momentum appears to be slowing in the near-term. The Banking Index ($BKX) actually showed relative strength by closing positive last Friday. This occurred after bouncing off key support of its prior low from January:

If the "smart money" starts buying financials at these depressed levels, it could lead to a tradeable counter-trend bounce in the broad market. Nevertheless, it's risky to blindly call a bottom without some type of price and/or volume confirmation. The major indices could easily probe below their intraday lows from January and trigger a slew of protective stops before the specialists begin scooping up shares. Overall, we feel both long and short positions are risky with the major indices at such pivotal levels, though the long-term trends clearly continue to favor the short side. This is a good time to patiently wait on the sidelines, preserving capital until stocks show their hand for the direction of their next move.

Using a tight trailing stop, we sold the UltraShort Real Estate ProShares (SRS) position last Friday morning for a gain of nearly 9 points. We also sold the UltraShort S&P 500 ProShares (SDS) on the open, netting a 2.5 point gain. As both positions were entered only the previous day, this is a good example of how we've been saying that a very short-term time horizon on your trades is much better in a bear market. We are once again "flat and happy," awaiting the next trading opportunity with a nice risk/reward ratio.

Open ETF positions:

Long - (none)
Short - (none)

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.

<< My Home | TheMoneyBlogs Home

• It's Not Armageddon. . .
• Basic Materials Sector Forming Short-term Bottom
• Disappointed? Yes. Discouraged? No.
• Stop! Hammer Time!
• Japanese Yen ETF Setting Up For Buy Entry

• October 2008
• September 2008
• August 2008
• July 2008
• June 2008
• May 2008
• April 2008
• March 2008
• February 2008
• January 2008
• December 2007
• November 2007
• October 2007
• September 2007
• August 2007
• July 2007
• June 2007
• May 2007
• April 2007
• March 2007
• February 2007

• PowerRate Your Favorite Stock Today!
• Morpheus Trading

• Alpha Trends
• Neville's Financial Blog
• Random Roger's Big Picture
• Millionaire Now! by Larry Nusbaum
• The Boston Real Estate Blog
• The Peridot Capitalist

• Midday Update: Wild Ride After The Open
• Dow Dips Below 8,000 Threshold, Reaching April 2003 Levels
• How Low Can We Go?
• And A Bad Omen It Was... Auy H&s Top
• Michael Lamonica: Delivering The Goods For Real Estate Success
• Fyi: Rss Feeds Must Be Reloaded