Commentary - October 9, 2013
A while back we talked about how bifurcation between the Dow and NASDAQ would not last forever. At some point, one index will make a move to catch up to the other. Typically, the strongest trending index will end up leading the lesser.
Over the past three weeks, the strongest trend has been seen on the Dow (and S&P), while the NASDAQ remained in a mostly sideways pattern, banging away at the upper reaches of its donchian channel. It was a great effort, but a real breakout never got going.
Yesterday things changed for the NASDAQ, it began to follow the Dow.
The Dow fell another 1.23% on the day, but in catch-up mode, the NASDAQ fell a faster 2%. Volume was strong and breadth numbers plummeted, suggesting broad based selling, not just profit taking of leaders.
The number of stocks trading above their 20 DMA dropped from 43% to 28% on the day. The ratio of new highs to new lows shrank to 39:28 on the NYSE and 54:26 on the NASDAQ.
The NASDAQ fell all the way to its 50 DMA on the day, and nor surprisingly, that's where selling took a breather. With momentum and short term cycles in the lower reversal zone today, look for a bounce on the indices, but also expect to see firm upside resistance at the Dow's 5 DMA, and the NASDAQ's 30 DMA.
What the break on the NASDAQ signifies is that the intermediate decline which has been affecting the Dow over the past three weeks is broadening. As we have discussed, it should last until the 34-40 day cycle bottoms in the next couple of weeks.
Our intermediate term trading bias is bearish on the Dow and S&P, and if the expected momentum bounce due over the next couple of sessions fails to push the NASDAQ back above its 30 DMA, we will have a bearish bias on it as well.
INVERSE ETF's plays like the DXD, and SSO are doing well, and the QID just broke above its 5 DMA. Remember, volatility is always higher in a bearish trend, so don't place stops too low on inverse plays. We trade the bear, and ride the bull.
Keep stops layered under those inverse ETF's at the 5 and 10 DMA for safety.