The Wagner Daily


Yesterday was another day of indecision as the major indices spent the entire day in a sideways trading range, inside of the previous day’s ranges. The S&P, Dow, and Nasdaq all traded relatively in sync with each other and all three major indices closed at their intraday lows, each nearly flat from the previous day’s closing prices. Volume was 41% higher in the NYSE and 22% higher in the Nasdaq, but those increases are misleading because of yesterday’s rebalancing of the Russell indexes, which required all fund managers to adjust their portfolios to reflect the new changes. Furthermore, yesterday was the last day of the quarter, meaning it was the last day institutions could buy or sell stocks and still have those positions reflected in their next quarterly statements. As proof that yesterday’s volume figures were distorted by both the Russell and end-of-quarter changes, consider that the NYSE volume was 7% LOWER than the previous day as of 3:00 pm EST yesterday. The additional volume that caused the 41% increase over the previous day all came within the final hour of trading. The advancing volume was also nearly equal to the declining volume in both the NYSE and Nasdaq, again indicating a lack of direction. Even though the major indices closed near their intraday lows yesterday, I don’t think we can read too much into the action because of the events discussed above.

Although there have been a few intraday trends during the past five days, the daily charts are clearly showing the broad market is in a “holding pattern” right now, toying with the primary uptrend line from the March 12 lows. The relatively narrow intraday trading ranges that have been occurring within the trading ranges of the previous day (also known as “inside days”) has made it challenging to profit from trading the broad market during the past week. As such, we have not been making many intraday trades, realizing the smartest thing to do is wait on the sidelines for the market to show us its next move. Because the major indices have been trading sideways for the past five days, it seems pretty likely that a break out of the range will occur within the next day or two. It is rare that a sideways trading range will continue for more than a week without either a breakout or breakdown of the range. Since the major indices have each been consolidating near the lows of the selloff from the mid-June highs, it would seem likely that the next move is to the downside, probably to the 50-day moving averages. However, we still have not seen any high-volume days in which the market has closed lower (also known as “distribution days”; yesterday did not count). Being mostly in cash right now enables us to be nimble, ready and waiting to capitalize on the market’s next major move, whichever direction it may be. Patience to do nothing and wait is one of the hardest skills for new traders to acquire, but it is also one of the most profitable skill once you master it. In fact, the best professional traders I know are out of the markets more than they are in the markets! But, when the time is right, they become very aggressive and make most of their monthly profits over the course of a few days. Most days in a typical week simply require no action.

On a different note, have you noticed that the Japanese markets have been showing incredible relative strength to the Western markets lately? Despite weakness in the U.S. and European markets yesterday, the Nikkei closed 195 points higher overnight, more than a 2% gain. In a broad sense, periods of Japanese economic contraction have historically coincided with periods of U.S. expansion, and vice versa. So, now that the U.S. is in a period of contraction, quite possibly a prolonged period, the Japanese markets may be poised to be entering a period of expansion. Last Friday, Japan reported a 2.5% rise in industrial output during the month of May from the previous month — the biggest rise in a year. Also, the Japanese employment rate rose for the first time in 26 months. Business sentiment has also been improving sharply. To top it all off, the Nikkei is rebounding off of 20-year lows! How can we capitalize on this? The easiest way is through buying EWJ, which is the iShares ETF for Japan. Take a look at the weekly chart of EWJ below, which illustrates the break of multi-year trendline resistance. Also note the recent increase in volume, which helps confirm the breakout:

Aside from a technical breakout out on the weekly chart, the fundamentals of Japan’s improving economy should further aide EWJ in rising. Per yesterday’s Wagner Daily, we bought a position in EWJ that we intend to hold with a target of just under $9, which is the high of 2002. If this happens, we will realize more than a 20% gain on the trade. It could easily take 6 months to a year to accomplish this, but we will be patient. It is my humble opinion that a position in EWJ offers a solid risk/reward ratio and is probably a lot less risky than buying the U.S. markets at current prices. Click here to visit the iShares web site to learn more about the components of EWJ. Also, because EWJ trades in a narrow intraday range, we have compensated for that by adjusting our position size to be four times the standard position size of SPY. Check the MTG Position Sizing Model for more details.

Today’s watch list:

DIA – DIAMONDS (Dow Jones Indu. Tracking Stock)

Trigger = below 89.68
Target = 88.80 (just below 50% Fibo retracement from May 20 low to June 17 high)
Stop = 90.08 (just above yesterday’s close)

Notes = We are looking to short the break of daily trendline support on a break of the two-day low. However, since the futures are gapping down a bit this morning, remember the MTG Opening Gap Rules, which basically state we will wait for a break of the 20-minute lows BEFORE shorting DIA if it gaps down to open below the trigger price.

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 (from June 30) –
    bought 7.30, stop at 6.80, target at 8.95, unrealized points = (0.03), unrealized P/L = ($14)

    WMH long (from June 24) –
    bought 39.40, stop at 38.90, target at 41.70, unrealized points = (0.10), unrealized P/L = ($12)


We bought EWJ yesterday at 7.30 and are still long WMH.

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