In Tuesday's Trader's Daily Notebook, we spent some time discussing the extraordinarily low volatility readings in the major-market ETFs, and that appears to have done the trick. In the span of 24 hours, we've gone from markets that barely moved and were sitting near highs, to widespread discussions of a major market top and why everyone should have been heavily short. As Helene Meisler often reminds us, there's nothing like price to change sentiment.
In studying the charts of the major-index ETFs above, several things stand out. The SPDR S&P 500 Trust ETF (SPY) , after not suffering a 1% loss since Oct. 11, has finally been knocked off its perch. What few have noted is the SPY hasn't declined 1% or more, while remaining above its 50-day exponential moving average (EMA), since April 5 and April 7 of last year. Both declines occurred on between 100 million and 113 million shares, which is quite a bit lower than Tuesday's reading of near 131 million shares.
The PowerShares QQQ Trust (QQQ) , after clinging to the 10-day EMA since the start of the year, has just been smashed beneath it. And the beating occurred on approximately double the 21-day average volume run rate. While the higher timeframe trend is still bullish on the QQQ, there's no question the index is displaying increased weakness.
After churning sideways for several months and failing to sustain a mid-February upside break, the iShares Russell 2000 Index ETF (IWM) is beginning to take on a notably more bearish look. Day and generally shorter timeframe traders are expected to begin selling the IWM on both breaks (to new swing lows) and intraday bounces, at least until price is closing back above the year-to-date (YTD) volume weighted average price (VWAP). Those looking for a line in the sand likely to trigger a whoosh of selling should remain focused on the $133 level highlighted in the March 15 Trader's Daily Notebook. For what it's worth, a break of $133 remains my primary trigger for adopting a more intermediate timeframe bearish trading posture.
I included a chart of SPDR Dow Jones Industrial Average ETF (DIA) with the other index ETFs, but truth be told, I rarely trade it. If you believe the shorter timeframe trend on the DIA is now bearish (which I do), then the next most logical area to target (regardless of whether you're trading short or stalking a new long) is the 50-day EMA and YTD VWAP (203.35 to 204.40).
Drilling down into the sectors that lost the most ground on Tuesday, I think it's fair to say everyone spotted the financials. Small- and mid-cap financials were hit especially hard. Names like Western Alliance Bancorp (WAL) and B of I Holding (BOFI) and East West Bancorp (EWBC) fell between 6.6% and 7.1% on very high relative volume. In the case of WAL, the stock broke beneath its 50-day EMA, something it hasn't done since surging higher in early November, on more than 4x its 10-day average volume.
While much of Tuesday's focus seemed to be on financials, I wonder how many noticed that steel actually performed even worse. Names like AK Steel (AKS) , Companhia Siderurgica (SID) and U.S. Steel (X) lost between 9% and 10.4% on the day. Even Nucor NUE, a name that was breaking above recent swing highs just last Thursday, was hammered back down beneath the 50-day EMA.
The bottom line is that while financials did garner a majority of trader attention during Tuesday's selloff, nearly all areas of the market were hit hard. The only areas that seemed to sidestep the selling, as you can probably imagine, were gold, silver, utilities and a handful of consumer defensive names.
Moving on to Wednesday's E-Mini S&P 500 futures (Es) auction, I believe we should begin by noting Tuesday's decline beneath the 21-day EMA leaves us with a bearish trend over the short term. Barring a major upside reversal over the next couple of days, a test of the 50-day EMA and YTD VWAP appears to be in our immediate future.
The four-hour Es chart above clearly illustrates the damage done during Tuesday's auction. While nothing is guaranteed in the world of short-term trading, the odds that we'll test the YTD VWAP (2314) over the next few days appears higher than recapturing 2360. It is, however, worth keeping in mind that the YTD VWAP has a tendency to attract large numbers of responsive buyers. This can obviously be both a positive and a negative. An initial test of the YTD VWAP will be expected to bring out the buyers, while an eventual failure to hold above that level (on a weekly basis) would likely trigger a sharp decline (the 200-day SMA is roughly 120 handles lower).
We'll enter Wednesday's Es auction with a primary focus on 2356.50 to 2358.50. While that area is nearly 17 handles above Tuesday's 2341.75 close, I am focused on it because I'd view any bounce toward that zone as a selling opportunity for active traders. As long as price remains beneath 2358.50, the path of least resistance is likely to remain lower, toward 2314.75 to 2316.75.
Scalpers will likely look to sell any early session rebound toward 2348 to 2350. But remember, given that we need to allow room for price to auction as high as 2358.50, a safer approach might be to allow any bounce to peter out, selling short only after price is beneath the developing session's VWAP and opening print.
Bearish continuation beneath Tuesday's 2338 intraday low targets 2335 and 2327.75. But as mentioned above, I wouldn't expect much in the way of sustained responsive (bid) participation until levels closer to 2314.75 are probed.
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