--> The Wagner Daily

The Wagner Daily


One important truth I have learned over the years is that the stock market is excellent at inflicting the maximum amount of pain to the maximum number of participants, at a time when the least number of people expect it to do so. Friday’s market action was a classic example of a reversal day that fit that bill. After a huge (nearly 2%) opening gap up that reeled in all the “late to the party bulls,” the major indices began heading lower after the first thirty minutes of trading and continued trending steadily down for the remainder of the day. When the dust settled, both the S&P 500 and Nasdaq Composite had closed negative on the day, at their intraday lows. The Dow, however, showed relative strength and actually closed the day with a very slight gain. Given the huge gains of the preceding days, traders who blindly followed the herd and bought Friday’s opening gap up clearly did not give much regard to risk/reward parameters. Buying Friday’s opening gap up was not a problem for traders who used tight stops, but the reality is that many of the amateurs who bought Friday’s exhaustion gap did not use tight stops. Many traders ignored risk management on the premise that “we’re in a bull market, so it will come back.” Obviously, that type of thinking has sent many trading careers to their graves over the years, which is why the primary goal at Morpheus Trading Group is, and always has been, a focus on CAPITAL PRESERVATION. We simply cannot and will not recommend new trade entries at levels where the risk/reward ratio cannot be justified.

When entering new intraday trades, it is important to always assess relative strength of the various markets to ensure that you are in the best indexes. The Nasdaq, for example, was clearly the weakest of the major indices on Friday, while the Dow was the strongest of the three. Therefore, if you wanted to be short during the selloff, QQQ (Nasdaq 100) would offer a better risk/reward ratio than a short position in DIA (Dow Jones Industrials). The indexes with the most relative weakness will drop the highest percentage and are also the least likely to go against you if the market reverses. By early afternoon, it was clear that QQQ had relative weakness because it was already trading below its morning lows while DIA (the Dow) was still in the middle of the intraday range. This became even more obvious by the end of the day because DIA closed above the HIGH of the previous day, while QQQ closed within pennies of the LOW of the previous day. The two charts below illustrate this divergence that took place on Friday:

Aside from the bearish price action, Friday’s huge market volume confirmed that the selloff was for real. Volume in the Nasdaq was a whopping 2.97 billion shares. This was not only the highest volume day of the year, but was also the fourth highest volume day in the history of the Nasdaq! Volume in the NYSE was the highest we have seen since November 21, 2002. Since both the S&P and Nasdaq closed negative on the day and volume was higher than the previous day, Friday was officially a “distribution day,” per the definition of William O’Neill of Investors Business Daily. For once, advancing volume did NOT outpace declining volume and this distribution day indicates institutional selling into strength. While one day alone does not mean anything very significant, a series of distribution days often are the first signal that a bull market is about to top. As of now, we have had two distribution days within the past seven days. As long-time subscribers of The Wagner Daily already know, volume is consistently the most important and reliable technical indicator we have at our disposal. So, pay close attention to the volume pattern over the next few days.

The broad market’s opening gap up and subsequent selloff down into the previous day’s range caused many bearish shooting star candlestick formations to be formed on the daily charts. Typically, this type of candlestick pattern will lead to lower prices in subsequent days. However, since Friday’s selloff was so strong, I would not be surprised to see some sort of price correction in the form of either an opening gap up or small rally on the open before prices head lower. Because the bull market has been so strong, it will be interesting to see whether Friday’s reversal day remains an isolated event and prices find support in the current range OR if the reversal day was the start of something more significant. It’s too early to tell, but at this point, I would venture to say the market probably does NOT go much lower before the buyers return. As discussed in Friday’s newsletter, we expect the S&P to find support around the 965 level, which formerly acted as a resistance point. If the S&P trades down to that level, we will be looking to begin once again building long positions. But, until then, we remain cautious on the long side of the market over the next several days. Earnings warning season is over the next two weeks, so be aware of those as well. Motorola warned this morning and the warning promptly sent the pre-market futures significantly lower.

Today’s watch list:

IWM – iShares Russell 2000 Index (small caps)


Trigger = above $91.10 OR below $90.35 (bounce into Fibonacci resistance or break of Friday’s low)
Target = $88.30 (38.2% Fibo retracement on daily chart)
Stop = $92.25 (beyond 61.8% Fibo retracment of Friday’s range)

Notes = The small caps finally showed relative weakness on Friday and we expect that to continue into today. Since the blue-chip Dow showed relative strength on Friday, it seems like we are seeing sector rotation out of the small caps and back into the large caps now. Since IWM is likely to gap down below our trigger point, remember to use the MTG Opening Gap Rules, which basically state that we need to wait for a break of the 20-minute lows before shorting IWM. This prevents us from shorting into a gap down, only to have it reverse in our faces.

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:

    EWJ long (half position) –
    bought 6.83 (avg.), sold at 7.12, net points = + 0.29, net P/L = + $104

    HHH short (from June 3) –
    shorted 36.65, covered at 38.09, net points = (1.44), net P/L = ($294)

Open Positions:

    EWJ long (half position) –
    bought 6.83 (avg.), stop at 6.75, target of 7.70, unrealized points = + 0.24, unrealized P/L = + $90


Looks like we were one day early on the HHH short because the weakest sector on Friday was the Internets, which dropped over 3% on the day. Although no “official” trade entries were called on Friday, several specific trade suggestions were made in the ETF Real-Time Room. These trade ideas, including HHH short re-entry, BBH short, and QQQ short, generated several points of profit and wiped out losses from earlier in the week for anyone who entered them. If you are not a subscriber to the ETF Real-Time Room and would like to see the commentary from Friday’s session, click here to view the transcript.

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

Follow us on Twitter

Latest Tweets