For a day where decliners swamped advancers by roughly two to one, you certainly wouldn't expect to find the SPDR Dow Jones Industrial Average (DIA) up on the day. Nor would you expect to find the SPDR S&P 500 Trust (SPY) lower by a mere 15 cents. But those are the stats.
So where was the selling? It was tucked neatly away inside the Powershares QQQ Trust (QQQ) and iShares Russell 2000 ETF (IWM). That's right. While shares of energy, consumer durables and utilities were largely positive on the session, nearly everything momentum and small-cap related was lying face-down in the gutter.
A passing glance at Monday's stats reveals a roughly 1% decline for the IWM, and 0.9% loss for the QQQ. Those losses, however, don't do Monday's selling justice. You need to dig deeper. You need to look at the charts of momentum favorites Tesla (TSLA), Tableau Software (DATA), LinkedIn (LNKD) and Netflix (NFLX). The majority of the stocks on my momentum watch list declined between 4% and 8%.
When you're through with the used-to-be red-hot momentum stocks, you can flip through the solar and biotech stock names. Names like SolarCity (SCTY), GT Advanced Technologies (GTAT), and First Solar (FSLR) were taken out back and shot. Biotech favorites Achillion Pharmaceuticals (ACHN), Jazz Pharmaceuticals (JAZZ) and Celgene (CELG) weren't treated much better.
Whether we're caught in a short-term hiccup kick-started by hedge funds needing to raise funds to purchase Alibaba, or we're seeing the beginning of a more meaningful decline is anyone's guess. The bottom line is Monday was a horrible day to be long beta. And while the Fed may successfully calm nerves with its post-meeting communiqué (and press conference) to be released Wednesday afternoon, I would encourage aggressive bulls to recognize the damage that many of the market's momentum leaders incurred during Monday's rout.
Away from the excitement of momentum and small cap issues, I want to review the iShares Transportation Average (IYT). To do this, we'll examine a chart of the IYT stretching back do mid-2013.
Of particular interest to me is the rising price channel that began around mid-2013, and the consistency with which the IYT has pulled back from the upper channel trend line when accompanied by a negative divergence. The current negative divergence (highlighted in yellow) is occurring at a time when price is in the middle of its price channel. As a result, the odds of price declining back toward the lower end of its price channel appear less favorable.
One possibility is that the current negative divergence will be resolved much like the one from mid-December 2013, or mid-June 2014. So in this instance, especially as it relates to those with a three-to-10-day trading timeframe, a trade may not be warranted. That overall pattern, however, is a good one. And something I'd recommend keeping an eye on.
- As noted in the comments section under Monday's Trader Daily, I liquidated my positions in Twitter (TWTR) and Achillion Pharmaceuticals. In the case of TWTR, I wanted to hold onto the stock through the close to give buyers a chance. But the aggressive selling across the various momentum names during the session's initial 30 minutes of trading forced my hand, and I sold the stock around $51. As far as ACHN is concerned, I actually sold the stock at Friday's close when it looked to be closing beneath the 10-day exponential moving average. I certainly wouldn't label TWTR or ACHN broken stocks. They do, however, need time to consolidate and form stronger bases to push higher from.
- Please check Columnist Conversation prior to Tuesday's open for an updated E-Mini S&P 500 futures profile and trade plan.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at email@example.com or posted to my twitter feed @ByrneRWS.