Turnaround or Turn Down Tuesday?

08/27/2013 9:56 am EST

Focus: ETFs

Thomas Aspray

, Professional Trader & Analyst

The term “Turnaround Tuesday” posits that, in general, Tuesday is the most favorable day for a bounce when the market is experiencing a sell off, and MoneyShow’s Tom Aspray examines the technical evidence to see whether or not that will be true today.

With last Friday’s close, it was quite the split market as the price action in the Nasdaq 100 and Russell 2000 was positive while the NYSE Composite, as well as the S&P 500 looked much less impressive.

The technical indicators on all four key averages were not showing any great strength as the on-balance volume (OBV) was not rallying with prices and the market internals were also not that impressive. My conclusion on Friday was that the market either needed to rally much more strongly early this week to support the bullish case or reverse to the downside signaling that the rally was over.

The prospect of American action in Syria hit stocks in the last hour of trading as the market hates uncertainty. Today’s headline was chosen after the close and before the overnight action as the market often turns around on Tuesday. The overnight and early action has set quite a negative tone because while the Asian markets were down less than 1%, the selling in Europe has been much heavier as the Euro STOXX 50 is down 1.6% in early trading. The US futures are also sharply lower.

Of course, it is today’s close that will tell us whether the correction has resumed or if the market is able to absorb this heavier selling. An updated look at the technical indicators and the key levels of support will provide a possible roadmap for the market this week.

A technical review of a popular inverse ETF, the ProShares UltraShort S&P 500 (SDS), will clarify why it was recommended by Tweet on Monday afternoon.

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Chart Analysis: The daily chart of the NYSE Composite shows that it moved above last Friday’s high on Monday but then reversed to close lower for the day.

  • There is next minor support at 9363, which was the minor 38.2% support from the June lows.

  • The 50% Fibonacci support is at 9258, which also corresponds to the daily starc- band.

  • The 61.8% retracement support is at 9163 with the June lows at 8803, line a.

  • The McClellan oscillator closed at -9 last Friday and dropped to -25 on Monday, but it is still well above last week’s low at -296.

  • The NYSE Advance/Decline turned down Monday after failing, so far, to move its declining WMA.

  • A strong move above its WMA would be a positive sign.

  • The A/D line has key support now at line e and a break below this level will indicate that it is now acting weaker than prices—a bearish sign.

The Spyder Trust (SPY) hit a high of $167.30 Monday, which was just above the 50% retracement resistance at $167.18 that was calculated from the August 2 high at $170.97.

  • The uptrend from the November 2012 low, line f, was briefly broken in June. It is now at $164.90.

  • The starc- band is at $162.74 with the weekly at $160.05.

  • The 38.2% Fibonacci  retracement support is at $157.05, which is 5.4% below current levels.

  • This support is 8% below the all-time high with the 50% support level at $152.79.

  • The OBV dropped below its WMA on August 12 (line 1).

  •  The OBV stayed below its WMA on the recent rally and has now turned lower.

  • The S&P 500 A/D line dropped below its WMA several days before the OBV.

  • The A/D line has turned lower after approaching its declining WMA.

  • There is next important support for the A/D line at line h.

NEXT PAGE: What It Means

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The ProShares Ultrashort S&P 500 (SDS) is a double inverse ETF that tracks the S&P 500. Last Wednesday it hit a high of $38.81.

  • The downtrend that connects the April and June highs, line a, is at $40.99.

  • The quarterly pivot is at $41.13 with the June high at $42.41.

  • SDS dropped back to test its rising WMA and support at $37.46 (line b) before turning higher.

  • The OBV has turned up from its rising WMA and the uptrend, line c.

  • The daily starc+ band is at $39.43 with the starc- band at $36.89.

The PowerShares QQQ Trust (QQQ) made a new rally high by one cent on Monday before closing just barely higher and forming a doji. A doji was also formed last Friday so an LCD could be triggered Tuesday.

  • The QQQ has been outperforming the S&P 500 since the June lows as both the weekly and daily relative performance (not shown) are positive.

  • The 20-day EMA is at $75.96 with more important support at $75.12 (line d) and the recent lows.

  • There is further support in the $73.50-$74 area with the quarterly pivot at $71.18.

  • The daily OBV closed Monday just above its slightly declining WMA.

  • There is important support for the OBV at line e.

  • The Nasdaq 100 A/D line shows a pattern of lower highs, line f, as it has formed a series of negative divergences.

  • The A/D line has just rallied back to its declining WMA and has failed to move above its previous peak.

What It Means: With the Dow futures down over 100 points, and the S&P futures losing 16 points, it is likely to be a rough opening. Of course, the key will be the close and then how the market then responds in the following days. Those most oversold Nasdaq 100 stocks I discussed yesterday may be especially vulnerable.

How to Profit: No new recommendation as the inverse ETFs are set to gap higher on the opening.

Portfolio Update: In yesterday’s 3:23 pm EDT Tweet, I recommended buying the SDS at $37.78 or better, with a stop at $35.92. It hit a low of $37.76 about 20 minutes after the Tweet. Raise the stop now to $36.46.

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