Bullish candlestick chart patterns on Monday? What "hammers?" Completely ignoring the reversal patterns formed by Monday's late-afternoon, high volume rally, the main stock market indexes plunged sharply lower yesterday, taking out the lows of the previous day's wide trading ranges. Maintaining the trend of extremely high volatility we've been seeing lately, all the major indices plummeted more than 5% yesterday. The Dow Jones Industrial Average nosedived 5.1%, the S&P 500 5.7%, and the Nasdaq Composite 5.8%. The small-cap Russell 2000 tumbled 6.2%, as the S&P Midcap 400 shed 5.4%. All the major indices limped in to the finish line at their worst levels of the day.
Volume receded from Monday's swift pace, but remained above 50-day average levels. Total volume in the NYSE declined 12%, while volume in the Nasdaq eased 19%. Market internals returned to being just plain ugly. In both the NYSE and Nasdaq, declining volume blew away advancing volume by a margin of approximately 20 to 1.
Because of Monday's bullish reversal pattern that occurred late in the day, we liked the reward/risk ratio of lightly "dipping a toe in the water" on the long side when the broad market pulled back early yesterday afternoon. As such, we bought Ultra Nasdaq 100 ProShares (QLD) when it retraced to its short-term 61.8% Fibonacci retracement level from Monday's low to Tuesday morning's high. The bounce at that retracement level came right on cue, but the bears quickly took control, causing the rally attempt to fizzle out less than an hour later. Below, the 15-minute intraday chart of QLD shows our entry point, as well as the price we stopped out:
Even though our QLD trade stopped out pretty quickly (for a smaller than average loss), our entry point represented the lowest risk point to enter a new long position if Monday's reversal was to follow through to the upside. Considering QLD subsequently moved much lower, our stop was in the right place, and the loss was minimal. Meanwhile, CurrencyShares Japanese Yen Trust (FXY), our only other open position, performed well yesterday. It gapped lower on the open, but trended higher throughout the day, closing slightly higher.
Yesterday, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each closed at a fresh five-year low. Over the past several weeks, we've pointed out the necessity of the major indices holding key support of their 61.8% Fibonacci retracement levels (from their October 2002 lows to October 2007 highs), but that's quickly become a distant memory. Trading below the 1,000 mark, the S&P 500 has already fallen more than 100 points below the 61.8% retracement level.
