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The Wagner Daily


Yesterday was a distribution day in which volume was strong, but the
major indices closed lower on the day. It was also marked by sector rotation out
of the Nasdaq and into the Dow and S&P. The broad market reminded me of a
tug-of-war session in which the Nasdaq’s weakness was trying to make the broad
market collapse while the strength in the Dow (fueled by KO) attempted to make
the broad market rally. As you can probably guess, the end result was that
neither won and the broad market instead rallied up to resistance in the
morning, sold off down to support in the afternoon, and closed near the middle
of the intraday range. For SPY and DIA, the entire range was within the previous
day’s range. However, the Nasdaq showed relative weakness and briefly broke the
previous day’s low before recovering slightly into the close.

strength could be clearly seen in DIA (Dow Jones Industrials) for the first time
in several months. This initially became evident during the morning rally
attempt when the Dow quickly rallied above the previous day’s closing price, but
both SPY and QQQ lagged behind and failed to follow suit. DIA was also the only
one of the three broad-based indices to actually test the prior day’s high.
Because the Dow has been such a laggard in recent months, it was interesting to
see the relative strength in that index yesterday. Unfortunately, the Dow was
not able to get moving because the relative weakness in the Nasdaq held it down.

We are seeing some interesting sector rotation that is worthy of
pointing out. As you know, technology, biotech, and financial stocks have been
the primary sectors leading the broad market higher during the past two months.
Because of the strength we have been seeing in these sectors, several “old
economy” industry sectors were left behind in the rally. In particular, Oil
Service (OIH) and Consumer Staples (XLP) have both remained in a sideways
consolidation period near their lows during the recent rally. However, as the
broad market began to show signs of weakness yesterday, these two sectors sprang
to life, primarily due to sector rotation out of the tech stocks and back into
some of the sectors that have been forgotten about. The same thing occurred with
the Telecom sector (TTH) recently, but we spotted the shift in sector rotation
and profited from a long position in TTH. So, we are looking for potential long
entries in both XLP and OIH today, as detailed below in today’s watch list.

We are also watching for potential re-entries on the long side of both
BBH and EWJ. As you know, we netted a profit of more than 7 points the last time
we took a position in BBH and the Biotechnology HOLDR has now sold off down to
support around 100. Today will probably be choppy and act as a reversal day, but
we will be looking for a low-risk re-entry point in BBH over the next several
days. In addition, we are now looking for either a price correction
(retracement) or a correction by time in EWJ in order to re-enter because the
weekly trendline resistance has now been broken, but EWJ is due for a
correction. That’s why we took profits on the remaining 1/4 position of EWJ

Going into today, the Nasdaq is poised to break the neckline
of a bearish head and shoulders
that has developed over the past three days. I have annotated the
hourly chart of QQQ below to illustrate this:

When head and shoulders patterns follow through to the downside, the
predicted amount of the drop is typically equal to the distance from the top of
the head down to the neckline. In this case, that equates to a predicted drop of
about 70 cents below the neckline, or a target of about 27.50. However, we are
going to pass this short setup by due to hourly trendline support on QQQ, which
is around 27.90. Until the trendline is broken, the risk/reward of shorting QQQ
at its current price does not appear to be a good one. Nevertheless, it may be
interesting and educational to watch QQQ to see if it follows through with the
head and shoulders pattern. If, however, the neckline holds as support, the head
and shoulders pattern will not be confirmed. Overall, the rally is still intact
and yesterday was just a correction, but we’ll have a better idea if the rally
is running out of gas after we see if the market follows through to the downside
over the next few days. It could remain choppy out there, so be careful not to

Today’s watch list:

XLP – Consumer Staples Select SPYDER

Trigger =
above $19.37 (above May 7 open and shelf of horizontal price
Target = $20.00 (resistance of 200-day moving average)
Stop =
$19.20 (above yesterday’s close and afternoon “swing high”)

Notes = As
discussed above, we expect to see more sector rotation into the Consumer Staples
sector, which was left behind during the rally. We will buy on confirmation of
yesterday’s high being broken.

XLP is not yet listed on the MTG Position Sizing
, but the multiplier ratio will be 2.0 if it triggers (meaning the
position size will be double a position of SPY).

OIH – Oil Service HOLDR

Trigger = below
$57.90 OR above $58.70 (Fibo retracement to support or break of May 7
Target = $60.90 (prior resistance of Feb. 25 high)
Stop = $57.30
(below 0.618 Fibo retracement and below May 6 pre-breakout high)

Notes =
As you can see from the chart above, sector rotation into the Oil Service sector
is starting to occur. OIH broke resistance of its weekly downtrend line
yesterday and should follow-through to its prior high that was set on Feb. 25.
We will look to either buy a pullback to support OR buy a break above
yesterday’s high.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from
The Wagner Daily (ETF Intraday Real-Time Room trades are reported
separately in The Wagner Weekly). Net P/L figures are based on the
quantity of shares represented in the MTG Position Sizing

Closed Positions:

    WMH long (1/2 position from April 23) –
    bought 34.83 (avg.), sold 35.36,
    points = + 0.53, net P/L = + $25

    QQQ short (from May 7) –

    shorted 28.43, covered 28.41 (avg.), points = + 0.02, net P/L = ($4)

Open Positions:



We shorted QQQ when it triggered
yesterday, but the choppiness of the broad-market caused us to scale out and
cover the trade for a scratch. IWM short triggered, but we were not able to
borrow any shares from our broker to short it. Therefore, we are not counting
the trade, even though it would have been profitable.

We sold the
remaining 1/4 position of EWJ at 6.78 for a profit of + 0.54 and closed the rest
of WMH for a profit of + 0.53 when it hit our trailing stop. As always, the
profit of EWJ will be reported separately in the weekly newsletter since it was
originally called in the ETF Real-Time
. We were 100% cash overnight.

Click here for
a detailed explanation of how daily trade performance is calculated.

Click here for a detailed
cumulative report of MTG’s trading performance (updated weekly)

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

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

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.

otherwise noted, average holding time is 1 to 3 days once a position is
triggered. Updates on open positions are provided daily.

Yours in success,

Deron M. Wagner

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