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The Wagner Daily


Although the major indices started the day on a positive note, the bullish tone dramatically changed going into the final two hours of trading yesterday. The 50% Fibonacci resistance levels we discussed in yesterday’s newsletter did their magic and after six consecutive days of higher closing prices, the Nasdaq Composite finally sold off yesterday afternoon and broke its winning streak. In absolute price terms, the COMPX only closed down 5 points lower on the day, but merely looking at the price change from the previous day’s close does not give you an accurate representation of what occurred yesterday. The reality is that the Nasdaq sold off very hard in the afternoon and closed thirty points (nearly 2%) below its intraday high of 1620. Total market volume in the Nasdaq was a whopping 2.5 billion shares, the highest volume day we have seen since July 3, 2002. Since the Nasdaq closed negative yesterday on huge volume, this was clearly a bearish distribution day that cannot be ignored.

Within the Nasdaq, both the Semiconductors (SOX) and Biotechs (BTK) were among the weakest sectors and both sectors closed near their intraday lows. The Biotech index closed positive on the day, but it was only because of a large opening gap. After the open, the Biotech index began selling off and continued all the way into the close. BBH (the Biotech HOLDR) gapped up more than 5 points higher on the open, but closed only pennies higher than the previous day. In other words, the Biotech sector showed relative weakness yesterday, despite the fact it closed in the green.

Both the Dow Jones Industrial Average and the S&P 500 Index managed to close positive on the day, but both indices experienced the same scenario as the Nasdaq in that they sold off hard from their intraday highs (more than 1.2%) and closed at their intraday lows. Although the media was touting the continuation of both the S&P and Dow’s winning streak yesterday afternoon, it is deceiving because the media only addresses closing prices, not intraday price action. The reality is that we experienced a very clear bearish reversal day on each of the major indices that will probably lead to more selling over the next several days.

Despite early losses, we had a profitable day in the ETF Real-Time Room yesterday because we were ready and waiting to sell short the afternoon collapse. We realized solid gains from shorting both QQQ (Nasdaq 100 Index) and SMH (Semiconductor HOLDR) as soon as they broke below their 20-period MAs on their 15-minute charts. We then covered near the lows of the day, netting over one point of profit. The biggest reason we were prepared for a selloff was that the major indices were each pushing the upper channel of their daily uptrend lines, indicating a short-term overbought condition. While overbought conditions can persist for many days, the risk/reward of initiating new long positions during those conditions is not positve. The snapshot of SPY below was taken in the middle of yesterday afternoon and illustrates why we were ready to go short rather than buy yesterday:

Although we were relying on a variety of technical signals to sell short, the final confirmation to sell short came when a few of our subscribers began to get upset with us for not getting long yesterday. Those of you who have been trading for many years probably know that when the mass consensus is to be long the markets and everyone is going ape s**t about buying the markets, it is usually time to begin selling. Interestingly, mass consensus is often a great contrarian indicator because the general public is usually buying when they should be selling and selling when they should be buying.

One thing we found interesting is that the Dow Jones Average briefly traded up to 9,000 on an intraday basis, but found high levels of resistance in that area. Although a number such as 9,000 is arbitrary and does not provide any type of technical price resistance, large round numbers such as 9,000 often form what is known as “psychological resistance.” The general public thinks of large round numbers as being significant prices for the market, but the funny thing is that 9,000 is not much different from 8,990. Yet, resistance is often created at these large round numbers because it is where many investors and traders place their sell orders. Therefore, these numbers such as 9,000 often become self-fulfilling resistance levels. The intraday chart of the Dow below illustrates this phenomenon:

So much for the “Dow 9000” CNBC party — it may have to wait a while!

While it is certainly too early to say “the bull is dead,” yesterday’s action was indeed quite bearish. When a market such as the Nasdaq rallies off the morning lows, consolidates at the highs, but sells off and sets new lows into the close, it is known as a “bearish reversal day.” That type of price action usually leads to lower prices over the next several days because it has the effect of trapping and punishing the typical “late to the party Charlie” who waited until the absolute top to get long the market. Many of the major indices are now left with “bearish engulfing” candlesticks on their daily charts, which will probably lead to lower prices in the short-term. We therefore are shifting our bias from neutral to slightly negative during the next several days. However, we remain bullish on Japan and the Nikkei, which crossed over its 200-day moving average yesterday. We will re-assess at the end of the week, based on how well the market is able to rebound from yesterday’s high volume distribution day.

Today’s watch list:

IWM – iShares Russell 2000 Index (small caps)

Trigger = below 88.05 (below yesterday’s low)
Target = 85.10 (50% Fibo retracement from low of May 20 to yesterday’s high)
Stop = 89.60 (above yesterday’s high)

Notes = The Russell 2000 Small Cap Index, which has been leading the multi-month rally, began showing signs of relative weakness yesterday afternoon, after having a near-parabolic rally on the daily charts. We expect more continuation of this weakness over the next several days and will be shorting below yesterday’s low.

HHH – Internet HOLDR

Trigger = below 36.70 (below yesterday’s low)
Target = 34.80 (support of 20-day MA)
Stop = 37.80 (above yesterday’s open)

Notes = After several consecutive doji star candlesticks, the Internet HOLDR formed a bearish engulfing candlestick yesterday, indicating the balance of power has shifted and more selling is likely. We are looking to short a break of yesterday’s lows.

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:


Open Positions:

    EWJ long (DOUBLE position size from May 22 and June 2) –
    bought 6.83 (avg.), stop at 6.65, target of 7.70, unrealized points = + 0.03, unrealized P/L = + $24


Per yesterday’s Wagner Daily, we bought another full position of EWJ in addition the full position we were long from May 22. We now have a double position of EWJ, which is 1600 shares based on the MTG Position Sizing Model.

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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