Stock Market Breaks Down, But Two Of Our Swing Trades Breakout

[morpheustrading 10]

Stocks continued to sell off on Thursday, with tech stocks getting hit the hardest. The Nasdaq Composite sold off 1.2%, while most averages closed lower by 0.6% to 0.7%. The Nasdaq sliced through key intermediate-term support of its 50-day moving average, joining the Russell 2000 and S&P Midcap 400.

 

The S&P 500 closed just below (but not a decisive break of) its 50-day moving average yesterday, after undercutting its prior “swing lows” at the 1538-1539 support level:

 

 

The 50-day moving average is a very important support level during a rally, as it is basically the line in the sand for the bulls. When the major averages all break below the 50-day MA within a few days of each other, it is usually a good time to raise cash and sit on the sidelines.

 

The evidence below suggests that the market is now in a corrective phase, which forces our rule-based timing model into “sell” mode:

 

There are at least 5-6 distribution days in the market (strike 1).

Most of the main stock market indexes are trading below the 50-day MA (strike 2). We do not count the Dow.

Leading individual stocks are beginning to break down below key support levels (strike 3).

How long will a stock market correction last? No one knows, but there is one main clue to watch out for.

 

Can leading stocks that have recently broken down find support and stabilize? There is a big difference between leading stocks pulling back 15-20% off a swing high versus completely breaking down and selling off 40% or more from their highs. If most stocks hold above or around their 50-day MAs and fall no more than 20-25% or so off their swing highs, then we would expect any correction in the S&P 500 to be limited to around 4-6%.

 

US Natural Gas Fund ($UNG), a current holding in the model portfolio of The Wagner Daily, is in pretty good shape after yesterday’s (April 18) strong advance. The weekly chart below shows $UNG zooming above the breakout pivot, which is always a bullish sign:

 

 

As annotated on the chart above, $UNG is holding support of a steep uptrend line (black dotted line), while the 10-week MA (teal line) is beginning to pull away from the 40-week MA (orange line) after the bullish crossover a few weeks ago. One great thing about $UNG is that it has a low correlation to the direction of the overall stock market because it is a commodity ETF.

 

As you may recall, our actual swing trade buy entry into $UNG was based on the “cup and handle” chart pattern we originally pointed out in this April 2 post on our trading blog. Presently, $UNG is showing an unrealized gain of 6% since our April 8 buy entry, and is well positioned to continue higher in the near-term.

 

In addition to $UNG, we also continue to hold Market Vectors Semiconductor ETF ($SMH). Presently, this ETF is holding above its prior swing low, but is struggling to reclaim its 50-day MA. Nevertheless, based on our March 28 technical analysis of the semiconductor sector, we are still bullish on the intermediate-term bias of $SMH.

 

Alongside of $UNG and $SMH, our model portfolio is still long two individual stocks (bought when our timing model was in “buy” mode): Celldex Therapeutics ($CLDX) and LinkedIn ($LNKD).

 

Despite yesterday’s decline in the broad market, $CLDX broke out to a fresh all-time high and is currently showing an unrealized gain of 8.9% since our April 9 buy entry. The daily chart of $CLDX below shows our recent breakout entry point:

 

 

Our other individual stock holding, $LNKD, is roughly break-even since our swing trade entry point. However, we do not mind holding this A-rated stock through a corrective phase in the broad market, just as long as our stop is not triggered.

 

If the price action can remain above the 10-week MA, then we may be able to hold through earnings in early May and potentially catch the next big wave up. As detailed in this article that explains our strategy for trading around earnings reports, we previously netted a handsome gain of 22% trading $LNKD before and after its January 2013 earnings report.

[BlueHorseshoe 10]

You've circled three pullbacks in an uptrend on your S&P chart. I don't really see how this one looks much different, just a little more volatile. And you're at horizontal support as well, if you believe in such things. Why not buy it?

 

If this particular correction runs deeper or leads to a reversal and you had to exit with a loss . . . well the other two worked out so it wouldn't be a problem.

 

Or . . . you can try and call a market top every time things get twitchy

 

BlueHorseshoe.

[BlueHorseshoe 10]

If you'd done what I described above and exited on the close yesterday you would have netted something like 30 points, or $1500 per ES contract. I didn't count the drawdown, but it wouldn't have been much.

 

Or do you still think that the stock market has "broken down"?

 

BlueHorseshoe