The Trader Daily

 | May 07, 2014 | 7:30 AM EDT
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Overpriced momentum stocks weren't the only victims of Tuesday's selling. We also saw widespread selling across the banking, home building, retail and consumer discretionary sectors. The bottom line is that while the S&P 500 and Dow Jones Industrial Average continue to hold above their key moving averages, an increasing number of sectors are beginning to break down.

As far as what held up on Tuesday, the only sector I saw largely in the green was energy.

One of my favorite ratio charts to illustrate traders' attitudes toward risk and safety is the Consumer Discretionary Select SPDR (XLY) to Consumer Staples Select Sector (XLP). The logic here is simple. When traders want to take on additional risk, they buy the XLY and shun the XLP. When they're scared and want safety, they take the opposite side of the trade and buy the XLP.

We've seen the XLY underperform against the XLP several times over the past few years, and each time the weakness eventually migrated into the broader S&P 500. Barring a miraculous recovery on the part of the XLY, I see no reason to believe this time will be any different.

Weekly Ratio Chart XLY-XLP

While reviewing the individual components of the XLY, I came across a long term chart of PetSmart (PETM). For those interested in higher timeframe swing trade ideas, check out the massive head and shoulders on PetSmart's monthly chart. Depending on the thickness of your paint roller, it looks to me like a monthly (or weekly if you want to jump the gun) close under $62.5 would trigger a slide toward the $46 to $48 area.

Monthly Chart of PETM

While momentum traders were watching FireEye (FEYE) blow up in Tuesday's after-hours trading session, the rest of us were staring at the breathtaking decline in shares of Whole Foods (WFM). The big area to watch on WFM is $40 to $41, and the best timeframe to utilize is a weekly chart.  I'd let the stock settle down for a week and check back to see if its trading above or beneath that area. If it can't hold above $41, I'd avoid it like the plague.

Weekly Chart of WFM

SPDR S&P 500 (SPY) traders should begin Wednesday's session by recognizing Tuesday's double distribution (see the chart below). In an attempt to keep life simple, I'd avoid spending too much time stalking the SPY for long opportunities until the ETF closes a 15 or 30 minute bar above $187.50. I don't place high odds on buyers recapturing that level, but if they should accomplish it, I'd step away from day timeframe shorts and plot a course for $188.11 and $188.55.

My baseline expectation at Wednesday's open is downside extension. Initial support may be found near Tuesday's intraday lows, but the bottom line is that all trading beneath $187.50 targets $186.10.

15-Minute Profile SPY


 Additional Notes:

1. According to reports made public Tuesday afternoon, the Securities and Exchange Commission is probing brokerages over their handling of retail orders. More specifically, they're investigating the way retail orders are routed, executed and filled. Put another way, the SEC wants additional information from brokerages that sell their retail order flow.

This report could negatively impact firms such as E*Trade and Charles Schwab  that openly sell their retail order flow. Analysts have estimated that firms such as E*Trade and Schwab pull in between $90 and $100 million a year by selling their retail order flow.

2. Nevada gambling regulators have reportedly sent a memo to state casino operators recommending that they avoid any involvement in the medical marijuana industry. For those unaware, the majority of the publicly traded marijuana companies are listed on the OTC bulletin board and Pink Sheets. In fact, the only company I follow on a major exchange is GW Pharmaceuticals (GWPH).

Suffice it to say these stocks rise and fall on investor sentiment. So if you're involved in the sector, just be aware that this decision has the potential to trigger additional concerns among hopeful and glassy-eyed bulls. 

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at or posted to my twitter feed @ByrneRWS

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