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The Wagner Daily


Commentary:

As anticipated per our analysis in last Friday morning’s Wagner Daily, the major indices each reversed and closed at or below the lows of the previous day. Thanks to the broad market’s inability to break the June 6 highs AND the warning signs from the doji star candlesticks that formed the previous day (June 12), we were ready for the selloff and netted significant profits from shorts in DIA, SPY, and IWM. In pure absolute numbers, Friday’s selloff did not appear too bad. The Dow Jones Average lost 0.8%, S&P 500 lost 1.0%, and the Nasdaq Composite closed 1.6% lower. Given the recent gains, a price correction of 1% or so would appear to be no big deal. However, a closer look at a few hourly charts of the major indices will reveal that Friday’s selloff broke a key trendline that will likely generate lower prices and selling pressure over the next several days.

Although not easily seen on a daily chart, a close look at an hourly chart of the major indices illustrates that Friday’s selloff broke a primary uptrend line that has been in place since March 20. I have drawn this trendline on the hourly chart of SPY (S&P 500 Index) below:

On the chart above, notice how SPY attempted to rally into the final hour of trading, but did not get very far due to overhead resistance of the trendline. As I often discuss, prior support levels always become new resistance levels once support is broken. The inability of SPY to get back above the prior hourly trendline support is a clear example of this. If you were short SPY, an ideal level to place your stop would have been just above that trendline resistance (around 99.80). In addition to the S&P 500 Index, both the Dow Jones Average and Nasdaq-100 Index also broke below their hourly trendline support on Friday. To illustrate this, I have drawn the prior trendline support levels (now resistance) on the hourly charts of DIA (Dow Jones Average) and QQQ (Nasdaq-100 Index) below:

Looking at the QQQ chart above, notice how the Nasdaq was relatively weaker than both the S&P and Dow going into the final hour of trading because the Nasdaq barely rallied at all, while both the S&P and Dow rallied back to their trendline resistance levels. This relative weakness in the Nasdaq is to be expected because it further confirms the rotation we have been seeing out of the technology growth stocks and back into the “old economy” blue chips, primarily Dow-type stocks.

It’s important to note that last Friday’s volume in the NYSE was 18% lower than the previous day, while volume in the Nasdaq was 1.5% higher. Because the Nasdaq closed lower than the previous day on higher volume than the previous day, last Friday was technically a distribution day for the Nasdaq. However, NYSE volume was lower than the previous day (June 12), indicating an orderly selloff rather than a mass panic of institutional selling. While the volume may accelerate if we see further downside action over the next several days, we have not yet seen any confirmation that the rally is over. Nevertheless, breadth was pretty wide during Friday’s selloff because declining volume outpaced advancing volume by more than 4 to 1 in the Nasdaq and 3 to 1 in the NYSE.

It was interesting that many financial publications were blaming Friday’s selloff on a weaker than expected Consumer Sentiment report. While it is true that the selloff started at the exact moment the report was released, we feel the report was merely a good “excuse” for the market to head lower, which is what the technicals suggested in the first place. Why do we feel this way? Because several other economic reports also came in below expectations during the prior weeks, but the market shrugged it off and rallied anyway because the technicals were not yet suggesting a correction was due. My point in telling you this is to remind you to always make technical analysis your primary reason for initiating a trade because the market’s reaction to economic reports is usually going to be whatever the technicals and market sentiment is suggesting regardless.

Every year, Russell makes changes, both additions and deletions, to the Russell 3000 Small-Cap Index. Because these changes are so vast and tracking funds have to mirror the changes, there are often plays that can be based on these changes to the index. While we focus primarily on ETF trading rather than individual stocks, some of you stock traders may be interested in following the proposed changes to the index, which are going to happen at the end of this month. As such, I have compiled a list of these changes for you (Excel format), which is available by clicking here. These stocks are not meant to be recommendations for any specific trades, but is merely for your information.

Going into this week, the 1000 level on the S&P is now going to be perceived as a key psychological AND technical resistance level, since the 1000 area acted as resistance several times last week. For today, 990 is likely to be the first resistance level the S&P will run into because it corresponds with the low of June 12 (remember how prior support becomes new resistance). First support level for the S&P will be at Friday’s low, around 982.50 to 983. Resistance on the Nasdaq futures is at 1221 and then at 1239. Support of Friday’s low is at the 1204 area.


Today’s watch list:

Due to a stronger than expected NY Empire State Index released this morning, we are not listing any new plays for today until we see how the market digests this news later today. So far, futures action is positive, so we are not too comfortable recommending new short entries. But there is too much overhead supply to recommend long entries here either. So, we will wait it out and will send e-mail alert if we make any new entries.


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
Model
.

Closed Positions:

    DIA short (2/3 position size from June 13) –
    short 91.77 (avg.), covered 91.25, net points = + 0.52, net P/L = + $66

    OIH long (HALF position from June 12) –
    bought 65.58, sold 64.50, net points = (1.08), net P/L = ($56)

Open Positions:

    DIA short (1/3 position size from June 13) –
    short 91.77 (avg.), stop at 92.57, target at 89.75, unrealized points = + 0.19, unrealized P/L = + $12

Notes:

Per the intraday e-mail alerts, we shorted full position of DIA on Friday, covered 2/3 of the position size intraday, and took the remaining 1/3 position size overnight. The swing trade in OIH was stopped out (half size).

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
change.

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
updates.

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.

Unless
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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