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Morpheus TradingMajor Market and ETF Trading |
Taking Profits On The Rest Of Our Short Positions
Tuesday's breakdown to new lows in the major indices led to another session of substantial broad-based losses yesterday. Stocks attempted to rally twice during the day, but massive sell programs hit the markets during the final two hours. The Nasdaq Composite fell 1.6%, the S&P 500 1.4%, and the Dow Jones Industrial Average 1.3%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 1.5% and 2.1% respectively. Like the previous day, all of the primary stock market indexes closed at their intraday lows, as well as new multi-month lows.
Turnover swelled across the board, causing both the S&P and Nasdaq to suffer another "distribution day." Institutional selling triggered a 10% volume increase in the NYSE, while total volume in the Nasdaq came in 15% above the previous day's level. Higher volume losses have become the norm lately. Market internals were firmly bearish, but not extreme enough to suggest capitulation and the forming of a bottom. In the NYSE, declining volume exceeded advancing volume by a margin of 7 to 1. The Nasdaq ratio was negative by nearly 5 to 1.
The Nasdaq Composite broke well below its 200-day moving average yesterday, leaving the Dow Industrials as the only major index still trading above this long-term trend indicator. When we bought the UltraShort Dow 30 ProShares (DXD) on August 9, our original price target equated to the Dow testing support of its 200-day MA. In the final minutes of yesterday's session, DXD hit our price target, triggering our sell order and locking in a gain of nearly 5 points on the remaining shares. Since we sold half of the DXD position for a gain of 2.3 points the previous day, our average gain on the full position was 3.47 points (approximately 7%). Our remaining shares of the Short Russell 2000 ProShares (RWM) closed just 50 cents shy of our price target. We will be taking profits on RWM into today's opening gap down. The Oil Service HOLDR (OIH), which we sold short on August 14, fell nearly 5 points yesterday and is already showing a substantial gain. Though the stock market's correction is causing pain for long-term investors who only buy and hold, the rapid downtrend has yielded opportunities for short-term traders who participate on both sides of the market's trend.
Yesterday, we said that, "Frankly, we don't see anything on the long side of the market that looks appealing. Even if the market bounced today, we have not come across any ETFs we would be comfortable buying. This tells us that our best play now is to wait for the next decent upward retracement in the market, then initiate new short positions on the ETFs with the most relative weakness." As you might have guessed, our sentiment remains the same going into today. There clearly is no reason to buy stocks or ETFs right now, unless you are a rapid-fire daytrader. Eventually, the market will give signals that it is trying to find a bottom, causing new buying opportunities to present themselves. But until that happens, it's quite dangerous to blindly pick a bottom in the hopes of being a hero. Conversely, it's also risky to enter new short positions at current levels. On a near-term basis, stocks could easily put in a substantial bounce.
In the pre-market S&P and Nasdaq futures are pointing to a large opening gap down today. We will be taking profits and covering our remaining short positions into the opening weakness. Then, we will remain flat and happy, watching from the sidelines until the market starts to retrace a bit of its losses. As recently shown on our annotated weekly charts, the S&P 500 will soon be nearing key support of its March low (the 1,387 area). Both the Nasdaq and Dow are still well above their March lows, but the 200-day moving averages now loom as overhead resistance.
Open ETF positions:
Long - RWM (half position remaining)
Short - OIH
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 e-mail alerts are also sent 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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