A tug-of-war between the bulls and bears kept traders on their toes yesterday, but the bears grabbed the upper hand by the closing bell. After opening lower, the major indices immediately rallied to test their previous day's highs, declined several percent an hour later, reversed all the way back to test their morning highs just after mid-day, then fell to their intraday lows in the final hour of trading. The roller coaster session caused the Dow Jones Industrial Average to lose 2.5%, the S&P 500 3.1%, and the Nasdaq Composite 4.1%. The small-cap Russell 2000 dropped 3.0%, as the S&P Midcap 400 shed 2.8%. All the main stock market indexes finished near their lows of the day.
Total volume in the NYSE decreased 2% below the previous day's level, which is positive on a day of losses. Turnover in the Nasdaq, however, ticked 4% higher, causing the index to register a bearish "distribution day." Though it was the first display of institutional selling since the stock market's bullish reversal of October 16, it is negative to see a session of higher volume losses so soon after a high-volume reversal day. Market internals were obviously bearish, but not as extreme as we've become accustomed to seeing. In the NYSE, declining volume exceeded advancing volume by a margin of 4 to 1. The Nasdaq adv/dec volume ratio was negative by just over 6 to 1.
Last week, we sold our long position in CurrencyShares Japanese Yen (FXY) for a solid profit, after it began forming the right shoulder of a bearish "head and shoulders" pattern on its hourly chart. Since then, we've been monitoring its performance to see whether or not the pattern would follow through to the downside. Based on yesterday's price action, it now looks as though FXY is ready to make another leg higher, invalidating the "head and shoulders" pattern. Take a look at its daily chart below:
Annotated by the dashed, horizontal line, notice FXY is now poised to break out above a shelf of short-term horizontal price resistance at the $99.50 area. If it does, bullish momentum should send FXY to test resistance of its 52-week high of $103.46, set in March 2008. Although FXY is presently one of the strongest-looking ETF charts in the market, be aware that currency ETFs are notorious for large overnight gaps in both directions, caused by continuous trading of the FOREX markets. Be sure to give your stops enough "wiggle room" to account for these gaps. If buying FXY on the breakout above $99.50, consider a stop at least below the October 20 low of $97.77.
Yesterday, we said Energy and Basic Materials were two industry sectors that were starting to show relative strength to the major indices.
