Commentary:

As we anticipated in last Friday morning’s issue, both the S&P and Nasdaq took a rest on Friday. The rally into the upper channel resistance of the uptrend on the daily charts, combined with the fact it was a Friday, caused a selloff that trended well for most of the day. The double top that we discussed on the COMPX daily worked out well, enabling some solid opportunities for both intraday shorting and getting entries for swing shorts.

One educational point to remind you of is that the weakness of the Semiconductor Index on Thursday gave us a clue that the Nasdaq was going to be weak on Friday. Remember how we discussed that the market rarely goes anywhere without the SOX leading it? Friday was a solid example of that. If you learn to study and look for relative strength or weakness in major market sectors intraday, it often becomes a clue as to what to expect going into the next day. This gave us the idea to have bearish sentiment before Friday’s trading day even opened.

Going into today’s session, there is a good possibility we will see another day of weakness, although it may not trend as well as Friday’s selloff because there is a good deal of support on the charts at current price levels. That being said, I think there will be certain sectors that you can selectively stay short for the next day or two with little risk of new daily highs being set. It looks like the market may gap up a bit on the open, and I will be looking to fade the gap on the short side. Even though the market may bounce a bit here, I would be surprised if we don’t see at least another day or two of follow-through to the downside. Just remember to use trailing stops and keep tightening them as your trade gets more in the money.

The bad news is that this week is the week before Labor Day weekend, which is typically a VERY slow week in terms of volume. This causes a lot of quick reversals and choppiness that can often whip you out of otherwise good positions. Therefore, it’s not a bad idea to reduce your position size this week on all trades. To be honest with you, it is often quite difficult to be profitable on the week before Labor Day, but if you keep your position size small, you won’t get hurt and may even make a buck or two. The good news is that volume historically picks up after Labor Day as the Street returns from their vacation homes in the Hamptons and retail investors get their kids back to school. Just something to be aware of.

Finally, I want to let you know that we are in the process of developing a live intraday trading floor for traders who are also interested in trading ETFs intraday (like I did with SMH and QQQ short on Friday). The virtual trading floor will be a one-way “read-only” trading room that will be available to you as a supplement to your subscription to The Wagner Daily.

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Today’s watch list:

DIA – DIAMONDS (Dow Jones Index Tracking Stock)
Sector: n/a
Short

Trigger = A RALLY UP TO 88.90 OR HIGHER
Target = 86.90
Stop = 89.65

Notes = This is a FADE play, which means that we will be looking to trade in the opposite direction of the market. If the Dow breaks below 8800 ($88 on DIA), it will have broken the lower channel support of its uptrend on the daily and will likely trigger some significant selling. It’s next support is at the 20 day MA right around 8700. Even if it doesn’t break 8800, the Dow should at least re-test Friday’s low, enabling you to make a small profit due to fading the gap up. Good risk/reward ratio on this play if we fade the gap up.

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PPH – Pharmaceutical Index HOLDR ETF
Sector: Pharmaceutical
Short

Trigger =
A RALLY UP TO 77.25 OR HIGHER
Target = 75.95
Stop = 78.05

Notes = This is a FADE play, which means that we will be looking to trade in the opposite direction of the market. The Pharmaceutical Index (DRG) closed very weak, at the low of the day on Friday. I would expect at least another day of selling, but we will probably see a rally first. That rally is what we will be looking to short.

Note that we will only be looking to enter this trade if it rallys UP TO 77.25 OR HIGHER. If the bounce to that price never comes, then we probably will not enter it. The reason we want the bounce is to put the risk/reward ratio in our favor. Shorting at current price levels does not offer a good ratio, but selling short into strength is a better idea because there is resistance overhead and the stop loss is tighter.

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Deron’s Report Card:

Both the SPY and SWH shorts triggered and thus far are profitable positions. Because the market closed so weak and near its intraday lows on Friday, I took both positions short over the weekend. However, as you will see below, I have tightened the stops on both of these trades to lock in profits.

If the current pre-market gap up in the futures holds into the open, I will cover half of my short position in both SWH and SPY at the market open. However, I will be using a stop that is a little more than break-even on the second half of the position because I don’t think the gap up will hold. When the futures change directions against you overnight, this trade management technique allows you to still lock in profits, but not throw in the towel too soon, only to watch the trade eventually go back in your direction. If the second half of the trade gets stopped out, you will break even or better on that half, but you still made a solid profit on the first half. This technique usually works pretty well for me.

Closed Positions:

(none)

Open Positions:

SPY short – shorted 95.89 (average), will cover FIRST half at market on the open, SECOND half stop lowered to 95.60, open with + 1.29

SWH short – shorted 27.51, will cover FIRST half at market on the open, SECOND half stop lowered to 27.51, open with + 0.58

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Glossary and Notes:

Remember that opening gaps that cause stocks
to trigger immediately on the open carry a higher degree of risk because the
gaps (both up and down) often do not hold. Use caution if trading stocks with
large opening gaps.

Trigger = Exact price that stock must trade
through before I will enter the trade. If a long position, I will only enter the
stock if it trades at the trigger price or higher. For a short position, I will
only enter the stock if it trades at the trigger price or lower. It is really
important to only enter the position if the trigger price is hit, otherwise the
trade becomes riskier.

Target = The anticipated price I am
expecting the stock to go to. However, this does not mean that I will
always hold the stock to that price. If conditions warrant, I will sometimes
take profits before that price, in which case I will notify you of the
change.

Stop = The price at which I will have a physical stop
market order set. As a position becomes profitable, this stop price will often
be adjusted to lock in profits. Again, you will always be notified of such
changes in the next daily report or intraday if you subscribe to intraday
updates.

SOH = Sit On Hands (Don’t Make Trades)

Closed P&L under Deron’s Report Card is based on the actual
price I closed my trade at, not just the theoretical target or stop price listed
for each stock. Open P&L is based on the closing prices of the most recent
trading day.

Unless otherwise noted, average holding time is 2 days to 2
weeks once a position is triggered. Updates on open positions are provided
daily.

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Yours in success,

Deron M. Wagner