For a second consecutive day stocks finished down but well off the session lows. However, trade was heavy on a down day in the market. The Nasdaq ended the day down 1.3%. Both the Dow Jones Industrial Average and the S&P 500 slid 1.1% in Tuesday's action. The small-cap Russell 2000 shed 0.9%, while the S&P MidCap 400 put in the best showing, as it fell 0.7% on the day.
Market internals were negative but somewhat tempered by the fact that stocks finished well above the session lows. Still, gap downs of the magnitude seen in yesterday's session are generally not a healthy sign for bulls. Volume was up sharply across the board. Turnover increased on both the Nasdaq and the NYSE by 33%. Advancing volume fared poorly across both indices. Down volume overwhelmed up volume by a ratio of 4.7 to 1 on the NYSE and 4.2 to 1 on the Nasdaq.
The Regional Bank HOLDRS ETF (RKH) recently formed a head and shoulders like reversal pattern. Yesterday RKH gapped down below the neckline, reversed and then rallied back into the neckline. A light volume move toward the two day high of $87.17 could provide a possible shorting opportunity for this ETF. Should this technical pattern hold true to form, the projected decline for RKH would be a move back to the 200-day MA. We will be monitoring RKH intraday for a potential short setup.
The iShares Dow Jones US Telecom Sector ETF (IYZ) lost support yesterday but rallied off the session lows to close at the newly formed resistance level near $22.70. An overcut of this key mark could provide a shorting opportunity in IYZ.
The market demonstrated signs of resiliency on Tuesday but it would be a stretch to consider the overall action as healthy for stocks. As we stated in yesterday's newsletter, we will be monitoring the market for intraday setups as opposed to pre-determined entries.
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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