Stocks concluded another volatile week of trading with a session of roller
coaster price action last Friday. The broad market trended lower throughout the
morning, causing the major indices to retrace more than half of their previous
day's gains by mid-day. The tone abruptly changed in the afternoon, as the bulls
rallied the main stock market indexes to new intraday highs, and even into
positive territory for the day. But the bears struck back in the final hour of
trading, shockingly sending stocks back down to close at fresh lows of the day.
The Dow Jones Industrial Average fell 3.8%, the S&P 500 4.2%, and the Nasdaq
Composite 5.0%. Giving traders a bad case of whiplash, the small-cap Russell
2000 gave back 7.1% of the prior day's 8.5% gain. The S&P Midcap 400
declined 5.3%.
Turnover declined substantially last Friday, slightly easing the blow of the
day's losses. In both the NYSE and Nasdaq, total volume decreased 24% below the
previous session's respective levels. Higher volume losses immediately following
the bullish "accumulation day" of October 13 would have been quite negative, so
it's positive that trading at least slowed. Volume in both exchanges also came
in below average levels. Across the board, market internals were roughly as
negative as they were positive the previous day. Declining volume in the NYSE
and Nasdaq exceeded advancing volume by a ratio of 9 to 1.
After the strong gains and bullish reversal of November 13, we said, "In the
short-term, our plan is to wait for the major indices to approach support of
their 20-period exponential moving averages on the hourly chart (20-EMA/60 min).
During trend reversals, waiting for the major indices to touch their 20-EMA/60
min., rather than chasing a parabolic rally, is an ideal way to participate in
the bullishness with a controlled level of risk." As per our pre-determined
plan, that's exactly what we did last Friday, buying a partial position of Ultra
S&P 500 ProShares (SSO) when it pulled back to touch its 20-EMA/60 min. just
over an hour into the session. SSO subsequently probed a bit lower and kept
finding support at its previous hourly downtrend line. This eventually triggered
a powerful rally to a new high of the day, but a massive wave of selling in the
final hour sent SSO back to its lows. Take a look at the hourly chart of
SSO:
On the chart above, the beige line is the 20-EMA/60 min., a great indicator
of short-term support or resistance we commonly use. The first pullback to that
moving average, around $26.40, marks our buy entry (circled in blue). Waiting
for that pullback was, of course, much safer than buying into strength near the
previous day's close.
