A Reversal Is Near? – (SPY) (QQQ)


Stocks were trounced on Monday as trade surged. All five major indices closed well in the red. The small-cap Russell 2000 and the S&P MidCap 400 led the carnage as they plummeted by 5.4% and 4.7% respectively. The Nasdaq slid 3.3% while the S&P 500 and Dow Jones Industrial Average lost 2.9% and 2.4% respectively. The only bright note on Monday was that the selloff was not as bad as it could have been given the relentless selling.

Market internals were decisively bearish across the board. Volume spiked by 25.5% on the Nasdaq and 10.8% on the NYSE. Declining volume overwhelmed advancing volume by a whopping 32.3 to 1 on the NYSE and 11.8 to 1 on the Nasdaq. Selling was broad based with no sector finding refuge on the day. Monday was a clear distribution day on Wall Street.

Via an intraday alert we covered our short position in XLP early in the session for a modest gain. We made a judgment call to cover the trade as XLP was showing signs of relative strength to the broad market. Later in the session we sold half of our position in EFZ for a 2.5 point gain and half our position in SRS for a 2.0 point gain (see notes section below regarding SRS). Should the market follow through with a morning gap down, we anticipate selling the remaining shares of both positions at that time.

In the aftermath of yesterday’s move, a review of the broad market is in order. As anticipated the S&P 500 took out support at 1,120 and is now positioned to test the next key support level at 1,100. If we lose 1,100 on the S&P then a move to 1,040 is a distinct possibility. For weeks the Nasdaq had been showing relative strength to the broad market but in just a few recent sessions the Nasdaq lost its relative strength and is now testing support at the August 9th low. If the Nasdaq fails here, the next major support level is the 200-week moving average (see weekly chart).

Given the destruction in the market yesterday quality short setups are virtually nonexistent. There are plenty of ETFs that are losing support that are shortable, but none that are in line with our risk/reward parameters. This is why it’s important to identify and be in quality setups before the big break. Once the break occurs it’s too late. This is where novice traders begin chasing the market lower only to get demolished when the market reverses higher. The late afternoon bounce was likely the result of short covering by professionals into the close. That suggests that retail traders were responsible for the decline in the last 20 minutes of the day. As the professionals were getting out, the amateurs were getting in.

Rest assured bear market reversals are viscous and it’s best to be out of the market well ahead of the turn. We never attempt to squeeze every last dime out of a trade. We most likely caught the majority of this decline and it is now time to exit our positions into weakness and wait for the next round of opportunities to present themselves. Time is now best spent managing open positions and patiently waiting for the next market bounce to begin identifying the next group of quality short candidates. The current market environment is now likely best suited for momentum day trading.

Today’s Watchlist:

There are no new official setups for today. As always, we will send an Intraday Alert if any new trades are made.

Daily Performance Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices

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  • ZSL was removed from the watchlist. Per intraday alert, we sold half of EFZ and SRS to lock in gains and covered XLP for a small gain. The remaining half position of SRS hit its target at 19.00 just before the close. We did not have enough time to send out an alert confirming our sell, but SRS can be sold this morning at a higher price for all those who missed yesterday’s sell.
  • Reminder to subscribers – Intraday Trade Alerts to your e-mail and/or mobile phone are normally only sent to indicate a CHANGE to the pre-market plan that is detailed in each morning’s Wagner Daily. We sometimes send a courtesy alert just to confirm action that was already detailed in the pre-market newsletter, but this is not always the case. If no alert is received to the contrary, one should always assume we’re honoring all stops and trigger prices listed in each morning’s Wagner Daily. But whenever CHANGES to the pre-market stops or trigger prices are necessary, alerts are sent on an AS-NEEDED basis. Just a reminder of the purpose of Intraday Trade Alerts.
  • For those of you whose ISPs occasionally deliver your e-mail with a delay, make sure you’re signed up to receive our free text message alerts sent to your mobile phone. This provides a great way to have redundancy on all Intraday Trade Alerts. Send your request to [email protected] if not already set up for this value-added feature we provide to subscribers.

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      Edited by Deron Wagner,
      MTG Founder and
      Head Trader