today’s watchlist (potential trade entries):

open positions:

Below is an overview of all open positions, as well as a report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on two separate $50,000 model portfolios (one for ETFs and one for stocks). Changes to open positions since the previous report are listed in a pink shaded cell below. New entries are shaded in green cells. Be sure to read the Wagner Daily subscriber guide for important, automatic rules on trade entries and exits.

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closed positions:

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ETF position notes:

• EEV buy entry triggered. Sold VNM at market on the open for a small loss.

stock position notes:

• Sold UA, DNKN, and SWHC on the open.

ETF and broad market commentary:

Stocks got wrecked on Friday but on mixed trade. All five major indices fell 1.3% or more with the Nasdaq leading the plunge. By the closing bell the tech-heavy index had slid a hefty 2.3%. The small-cap Russell 2000 dropped 1.8%, while both the S&P 500 and S&P MidCap 400 fell 1.6%. The Dow Jones Industrial Average saw the least damage as it contained losses to 1.3%.

Market internals were mixed on Friday. Volume fell on the NYSE by 2.9% but rose on the Nasdaq by 4.3%. However declining volume easily topped advancing volume on both exchanges. By the close, the spread ratio on the Nasdaq stood at a hefty -8.7 to 1 and on the NYSE at -5.9 to 1. The NYSE escaped distribution but the Nasdaq fell prey to heavier selling. However, since we already have a sell signal in the broad market, there’s little need to track distribution days, other than as an indication of the strength of any moves lower.

Now that we’ve seen heavy selling pressure for two days, it is probably a good time to review key support levels on the Nasdaq and the S&P 500.

Price action was horrible on the S&P 500 on Friday, as it gapped down, opened at the high and closed at the low of the session. The next important support levels on the S&P 500 are 1,357 and 1,340. We would not be surprised to see a fairly significant bounce off either, or both of these levels. Notice that the S&P has now cracked its long term uptrend line and this mark should now serve as resistance.

Nasdaq is still above its long term uptrend line, which coincides with the March 6th low of 2,900. Naturally, we would expect the Nasdaq to find support at this level. The Nasdaq also has support at the April 23rd low (2,944). An undercut of this level could easily result in a bounce on this index.

Both SOXS and EEV performed well on Friday. We are modifying the target on SOXS and EEV, and we are also raising the stop on EEV only. Details are posted in the open positions section of the newsletter. If there was any questing coming into Friday, we now have a clear sell signal in the market. We expect to see increased volatility in the market and will be looking to take profits, particularly on leveraged ETFs, into any market gaps. Despite the strength of the recent selling, now is most likely not a time to get greedy on the short side, since we are quickly approaching key support levels on the major indices.

stock commentary:

By cutting half of our long exposure early last week and again on Friday, we were able to limit the losses on open positions to just below breakeven. When the market turns sour we prefer to lock in gains on winners (if we have any) and raise stops (or sell right away) to limit losses and protect trading capital. Losses are impossible to avoid in this business, but were able to step aside with very little damage done and that is fine with us.

One of the key concepts behind the market timing model is that our trading should always be flexible. The model prevents us from falling back on past analysis, so we are always reacting to new market action, not predicting it. Those who have been with us for a while know that we stay away from predictions because it can easily lead to opinionated trading. When we enter the market with a buy signal it isn’t because we have a gut feeling, it’s because there are plenty of bullish patterns and the major averages are healthy. The buy signal could fail and we lose money, which isn’t the optimal outcome, but we did our job by following the buy signal and not trading on emotion.

The short-term plan is to avoid trading for a few days. With the market in oversold territory we could easily see a quick two to three day reversal to the upside so it is a bit late to establish new short entries here. As for the long side, we are forced to lay low until market conditions improve.

If you are a new subscriber, please e-mail rick@morpheustrading.com with any questions regarding our trading strategy, money management, or how to make the most out of this report.