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The Wagner Daily


The word of the day yesterday was “nimble,” which is what you needed to be in order to profit from yesterday’s market action. Although the major indices showed strength and smoothly trended higher in the morning session, the market reversed in the afternoon and trended down just as smoothly, erasing all of the morning gains. If you were not alert, it would have been easy to get stuck on the long side of the market and give back all your profits. But, through the use of trailing stops, we were able to close our SPY long position near the morning high, re-assess the market, then sell short once the S&P and Dow began to roll over in the afternoon. You certainly had to be alert yesterday, but our ETF Real-Time Room subscribers profited from both sides of the market because we remained nimble and “traded what we saw, not what we thought.”

There was clearly significant price divergence between the major indices yesterday because the Nasdaq futures showed relative strength to the S&P. Although the Biotech (BTK) sector was weak yesterday, the Semiconductor (SOX) sector was very strong. Because the Semis are so heavily weighted within the Nasdaq, this caused the Nasdaq to have relative strength. The divergence between the Nasdaq and S&P initially became apparent when the Nasdaq traded well above its high of the previous day in the morning session, but the S&P and Dow barely were able to break above their previous highs. When the selloff began later in the day, the S&P and Dow both dropped well below their lows of the previous day, but the Nasdaq continued showing relative strength and never even dropped below the previous day’s close. It’s important to look for divegence between the major indices on a daily basis because it helps ensure you are on the correct side of the market with the right broad-based ETF. Yesterday, for example, it would have been riskier to short QQQ (Nasdaq 100 Index) than to short DIA (Dow Jones Industrials) because the Nasdaq was stronger than the Dow. The two charts below illustrate the divergence, which we noticed early in the day:

Many subscribers were asking if yesterday’s mid-afternoon reversal was simply the result of a normal price correction or if it suggested something more significant, such as an intermediate-term market top. While there is not yet enough confirmation to know the answer for certain, there is indeed one VERY bearish thing we noticed about the past two days: distribution through volume. As I have said many times in the past, volume is the one technical indicator that never lies and it is also the most reliable leading indicator at your disposal. Volume typically leads price, so it’s important to continually assess the market’s total volume on a daily basis. If you have been doing so, you probably noticed that volume over the past two days was VERY high. As such, you would normally want to see correspondingly higher prices in the markets. However, the past two days have basically traded sideways instead. Interestingly, yesterday was the highest volume day of 2003 in the Nasdaq, but yet the Nasdaq basically closed flat. Volume was also relatively strong on the NYSE, but prices closed lower. This indicates institutional selling into strength, which is also known as distribution. It’s equivalent to a car spinning its wheels – the momentum is there and the gas is being applied, but the car is not going anywhere. Eventually, the buyers will go away and the selling pressure from the heavy volume will take the market lower. So, strictly from analyzing volume of the past several days, I can tell you that the market does not look too healthy right now.

On the other hand, the major indices are still within support of their hourly uptrend lines and have support of the highs from the week of May 12 – 16. Therefore, we don’t expect the market to head down quickly. It’s bound to be choppy and we could easily see some really whippy moves as traders play tug-of-war with the key pivotal support and resistance levels in the market (such as 950 on the S&P futures). Below is an hourly chart of SPY that illustrates the nearby support levels:

If the support levels shown above are broken, we’ll look to get aggressively short. But until the market proves otherwise, we need to assume that we remain in an uptrend and be cautious on the short side. However, because of the warning sign that volume is showing us, we need to be very careful on the long side of the market as well. So, what’s the bottom line? Remain NIMBLE and ready to change to the opposite side of the market at a moment’s notice. We’ll do our part to keep you informed of our analysis, but the rest is up to you. Have a nice weekend everyone.

Today’s watch list:

There are no new plays for today because we want to let the market settle and determine its direction at this critical point. Because of the mixed bearish and bullish signals, moves could be violent here and we don’t want to be on the wrong side of the market. However, we will send you an e-mail alert if we spot any low-risk trade setups. In the meantime, we remain long EWJ.

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:

    SPY long (1/2 position from May 29) –
    bought 96.15, sold 96.55, points = + 0.40, net P/L = + $37

Open Positions:

    EWJ long (from May 22) –
    bought 6.70 (avg.), stop at 6.55, target of 7.25, unrealized points = + 0.05, unrealized P/L = + $28


We bought SPY as a potential swing trade per yesterday’s newsletter, but sold it for a profit later in the day when the market reversed and it hit the trailing stop. We then shorted SPY for a profit several times in the ETF Real-Time Room, but all trades from the ETF Real-Time Room are reported on the weekly newsletter to avoid confusion with calls from The Wagner Daily.

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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