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The Wagner Daily


Although the broad market put in a valiant attempt at reversing the recent weakness last Thursday, the major indices ran out of gas and failed in their attempt to follow-through to the upside on Friday. Specifically, each of the major indices were unable to break through overhead resistance of their 20-day moving averages, which formerly was acting as support. QQQ (Nasdaq 100) closed in the middle of last week’s range, SPY (S&P 500) closed just above its low of the week, while DIA (Dow Jones Industrials) was the only one of the three major indices to close Friday at a new low of the week. The recent pattern of relative strength in the Nasdaq and relative weakness in the Dow continued through Friday, as evidenced by the divergence in how the major indices closed the week, relative to one another. Looking at the charts below, notice how the 20-day moving average has perfectly acted as resistance in each of the major indices during the past several days:

Obviously, the 20-day moving averages will continue to be the primary resistance level to watch in the coming days. Based on Friday’s week close, this week is “make or break” time for the major indices because of the position of the primary uptrend lines, which is still holding intact for QQQ and DIA, but not for SPY. Most technicals are pointing to a slow drift lower or even sideways, but not a total collapse because the longer-term weekly charts still look strong. It is likely we will see some great entry points on the long side very soon, especially if the indices drift down to their 50-day moving averages and bounce off that level for support. Just take it easy on both sides of the market for now because the weekly charts are too strong to be aggressively short, but the market does not appear ready to reverse higher yet either.

Despite one percent losses in both the Dow and S&P on Friday, it’s difficult to place too much credence in the selloff because volume did not confirm the weakness. Total market volume in the NYSE was nearly 8% lighter than the previous day, while Nasdaq volume was nearly the same. As you probably know from our daily analysis on volume, light volume on the down days indicates a lack of institutions running towards the exits. Since institutions control a vast majority of the overall market capital, it is their actions that generally move the market in one direction or another. Interestingly, the Nasdaq Composite has closed lower in six out of the last seven days, but volume has declined in every successive day. While the light volume on down days aids the bullish argument, it is equally important to note that volume on the last up day (June 26) did not proportionately increase over the previous down day. So, while there doesn’t seem to be a mad rush to sell, it’s also apparent that buyers are not yet ready to step up to the plate in large quantities either. This combination indicates the likelihood of choppy trading action in the coming week.

Be prepared for some wild action in today’s trading for several reasons. For one, today is the last day of the second quarter of the year. As such, you will probably see some last-minute “window dressing,” which occurs when fund managers buy the “hot stocks” of the past quarter so that they can give the impression of ownership when they issue their next quarterly reports. Even if they bought near the top, at least they can say “We owned every hot stock as of the close of the current quarter.” The final day of a quarter often brings erratic moves for this reason alone. However, to make it even more interesting, today is the day in which the annual Russell rebalancing occurs. Each year, various individual stocks are added and deleted to the various Russell indexes, which track small-cap stocks, in an effort to have continual representation of the best-performing small-caps. While most fund managers have already been making the necessary changes to their portfolios, today is the final day in which any funds who track the Russell indexes must rebalance their portfolios to accurately match the new changes to the underlying stocks. In past years, this has resulted in huge volume spikes during the final hour of trading, as well as whacky and irrational price swings in the Nasdaq. Our advice on how to trade this? Don’t even try to! We strongly recommend you exit all intraday trades by no later than 3:00 pm today and just watch the action instead. Click here to learn more about the Russell rebalancing. For your information, we have also prepared an Excel spreadsheet that lists all the proposed changes to the index that will occur today. You can download the spreadsheet by clicking here. Finally, aside from the end of quarter and Russell rebalancing, there is a Chicago PMI economic report due at 10 am EST today, which is likely to be a market mover as well.

Today’s watch list:

EWJ – Japan Fund

Trigger = above 7.30 OR below 7.20
Target = 8.95 (just below prior “swing high” on weekly chart)
Stop = 6.80 (50% Fibo retracement from April 2003 low to June high)

Notes = We have been stalking EWJ for a re-entry on the long side ever since we closed the position a few weeks ago for a 5% gain. Based on our analysis of the Nikkei (which EWJ loosely follows), we feel that the Japanese markets are just in the beginning phases of a bull market and we will use EWJ to participate in it. Please note that we are entering this trade with an estimated time horizon of MULTIPLE MONTHS instead of our usual trade of several days. Also note that, based on the MTG Position Sizing Model, a full position of EWJ is equal to four times the size of a SPY position due to the low volatility in 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:


Open Positions:

    WMH long (from June 24) –
    bought 39.40, stop at 38.90, target at 41.70, unrealized points = + 0.35, unrealized P/L = + $34


SMH traded through our trigger price on Friday, but we did not enter it due to the MTG Opening Gap Rules, which state that we wait for a break of the 20-minute highs before buying an ETF that has gapped above our trigger price. We remain long WMH with the same stop of 38.90.

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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