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The Wagner Daily


After a small opening gap down on the heels of a profit warning by Texas Instruments, the major indices sold off during the first 30 minutes of trading, then slowly recovered throughout the morning session. Within the first hour of trading, the broad market managed to pop above the previous day’s high, but the breakout was short-lived due to weakness in the SOX (Semiconductor Index), which dragged both the Nasdaq and the S&P back into the morning trading range by 12 noon EST. From that point on, divergence between the S&P and Nasdaq futures became clear because the Nasdaq was unable to break its prior highs while the S&P managed to set new intraday highs. Unfortunately, the relative weakness in the Nasdaq futures caused the S&P to be choppy, which made it difficult to remain long in the early afternoon because the breakout kept failing, despite the relative strength in the S&P. Once a prior resistance level is broken, it should become the new support level and stops can typically be trailed higher to just below the new support level. But, SPY retraced one more time into the range, hit our trailing stop, then promptly proceeded to head back higher. The release of the Fed’s Beige Book report at 2 pm EST yesterday was construed as positive and it sparked a rally into the final 90 minutes of trading. The rally subsequently caused the major indices to close at their intraday highs, which was within the range of the June 6 highs. The intraday chart of SPY below illustrates where SPY formed a triple top intraday, broke out to new highs, retraced back BELOW the breakout point, then turned around an ran to new highs:

Volume in the NYSE was 17% higher than the previous day, while the Nasdaq’s total volume was 7% higher. This is important because a breakout of a consolidation period should be confirmed by stronger volume. If yesterday’s volume would have been equal to or less than the volume of the prior day, it would have indicated that the major indices were rallying not because of an abundance of buyers, but rather a lack of sellers. While either scenario could cause prices to rise, a rally will always be more stable when it is caused by an increase in buyers rather than a lack of sellers. In addition, advancing volume in the NYSE outnumbered declining volume by over 3 to 1, while the Nasdaq’s advancing volume beat declining volume by a margin of just under 2 to 1. These ratios indicate that breadth was positive, further confirming the increase in volume. With the exception of the June 6 distribution day, a thorough analysis of the market’s daily volume over the past week continues to reflect the health of the current rally. Moving forward, the key resistance levels to watch on the major indices are the highs of June 6. If the market has enough momentum to break through that level without forming a double top, then 1050 should be the next major stop on the S&P futures (as discussed in the June 9 issue of The Wagner Weekly).

One important observation we have notice this week is a shift in sector rotation out of the small caps and back into the large cap blue-chip stocks. Prior to this week, the rally of the past month has been clearly led by stocks within the Russell 2000 Index (Small Caps), followed by the S&P 600 Mid-Cap Index, while stocks within the Dow Jones Industrial Average (primarily large-cap blue chips) have lagged. However, we are seeing the exact opposite situation this week because the Dow has clearly been showing the most relative strength and leadership, while the Russell 2000 Index has lagged the broad market. This indicates a normal change in sector rotation as institutions move large amounts of money out of the “overbought” indexes and into those indexes that have lagged the broad market. This type of rotation in leadership is a common occurrence in all trending markets and it is important to constantly focus on following the changes in leadership to ensure that you are trading and investing within the best indexes and sectors. If, for example, you were invested primarily in small cap stocks coming into this week, but failed to notice that leadership has shifted from the small caps back into the blue chips, you will miss out on the best profitable opportunities AND will have more risk by remaining in a sector that is showing relative strength. Because we are constantly focusing on the recognition of sector rotation on a daily basis, one of the biggest benefits that subscribers to our ETF Real-Time Room have is the ability to receive detailed analysis and commentary of these shifts in money flow. By capitalizing on trading in the sectors and indexes with the most relative strength, your profit potential is greater and your risk exposure is less.

So, how does one determine when sector rotation is taking place? The easiest way is to simply compare price changes on a percentage basis for each of the broad-based ETFs, relative to each other. You can also consult several charts of a given time interval and look for divergences. As an example, take a look at the two charts below. One chart is of DIA (Dow Jones Index Tracking Stock) and the other chart is of IWM (Russell 2000 Index Tracking Stock):

Looking at these charts, notice how the large-cap DIA nearly rallied back to its June 6 high yesterday, while the small-cap IWM only retraced about 50% of the selloff. That is a clear example of the divergence that we are referring to and is also the exact opposite scenario of the divergences we have seen prior to this week. So, what does this tell us? Buy the large-cap stocks and ETFs on pullbacks to support OR short the small-caps on rallies into resistance. Either one of those scenarios will offer you with the maximum profit potential with the least amount of risk. However, remember to follow the overall trend of the intermediate term, which is up. The current bull market has legs and internals remain intact, so shorting should be confined to short-term intraday trades of only the stocks or ETFs that are showing relative weakness. Being short overnight or trying to short a strong sector intraday is just too risky. You won’t win every trade by buying the strong sectors every day either, but the odds are a lot higher that you will be right more than you are wrong. And THAT is the name of the game!

Today’s watch list:

OIH – Oil Services HOLDR

Trigger = BELOW 65.60 (38% Fibonacci retracement of yesterday’s range)
Target = 68.10 (next resistance on weekly chart)
Stop = 64.50 (below the breakout level)

Notes = The Oil Service sector had a very strong breakout of a consolidation yesterday and we are looking for an entry on the first retracement down to Fibonacci support. We may adjust our entry point and will e-mail you the changes if we do.

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 7.16, net points = + 0.33, net P/L = + $120

    DIA long (HALF position from June 11) –
    bought 91.12, sold 91.46, net points = + 0.34, net P/L = + $31

    SPY long (HALF position from June 11) –
    bought 99.30, sold 99.40, net points = + 0.10, net P/L = + $7

    SPY long (HALF position from June 10) –
    bought 98.88 (avg.), sold 98.78, net points = (0.10), net P/L = ($13)

Open Positions:



We finally sold the remaining 1/2 position of EWJ for a gain of over 5%. We are still bullish on Japan, but wanted to sell into strength due to price resistance at 7.20 on the daily chart. Will look to re-enter on a correction. We also were in and out of SPY several times yesterday, per calls in the ETF Real-Time Room, and those trades will be reported in the next weekly newsletter.

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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