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The Wagner Daily


With the exception of the first and last thirty minutes, yesterday’s trading session was a real snoozer! Going into yesterday morning, you may recall that the S&P futures was stuck in a holding pattern from the previous day’s consolidation between the 1000 and 1005 level. As such, our plan was to do nothing until the trading range was broken. After a slightly negative opening, the market internals began showing signs of weakness and the S&P broke below support of the 1000 level within the first thirty minutes of trading. Upon seeing the first signs of weakness, we took profits by closing our long position in SPY (S&P 500 Index) and shorted DIA (Dow Jones Indu. Avg.), per a call in the ETF Real-Time Room, due to the continued relative weakness in the Dow. Although our entry price in the DIA short was ideal, we were quickly forced to cover for a small profit because the breakdown in the S&P was short-lived. Less than thirty minutes after the S&P broke support at 1000, it had rallied back above the 1000 level and back into the previous range of consolidation. With the exception of a few false breakouts, the S&P futures remained in the 1000 – 1005 range of consolidation throughout the remainder of the day, until slight buying activity pushed the S&P above resistance during the final thirty minutes of trading. If you remove the first and last thirty minutes of yesterday, the session was basically just a long extension of the previous day’s correction by time. Below is an annotated 15-minute chart of the S&P futures that illustrates the trading action described above:

Like the previous day, the Nasdaq once again showed the most relative strength, followed by the S&P, then the Dow, which showed the most relative weakness of the three major indices. Unlike both the S&P and Nasdaq, the Dow did not close above the previous day’s high. While the strength in the Nasdaq indicates traders and investors are willing to throw money at more aggressive “growth” sectors, I am viewing the divergence and recent weakness in the Dow as a warning sign that the recent rally may be getting a little tired. Broad market rallies are rarely sustainable for long without participation by the Dow. While this in itself does not mean much, it is simply one warning sign to be aware of so that you can keep a close eye on the Dow’s relative performance. Interestingly, two of the strongest sectors yesterday were Retail ($RLX.X) and Transportation ($DJT). In fact, the Transports were up a whopping 4.35% yesterday! Biotechs ($BTK.X) and Semiconductors ($SOX.X) were also strong. Weak sectors were Telecoms ($XTC.X) and Pharmaceuticals ($DRG.X). Following the relative strength and weakness within individual sectors is helpful for trading the sector ETFs on days when the broad market is stuck in a trading range.

Total market volume was nearly 10% higher in both the NYSE and Nasdaq yesterday. While this is bullish if the higher volume also correlates to higher prices on the day, higher volume is actually bearish if it occurs on a sideways consolidation or down day. Since the higher closing prices for the S&P and Dow did not come until the final few minutes of trading yesterday, I am inclined to believe that yesterday’s higher volume was largely marked by institutional selling, though it was not technically a distribution day because the major indices each closed higher (barely). A quick look at the breadth of yesterday’s volume confirms my bearish theory. In the NYSE, advancing volume barely outpaced declining volume by a ratio of only 1.43 to 1 yesterday. As you may recall, the ratio on the previous day was more than 4 to 1, much more bullish. So, this means that yesterday’s volume was 10% higher overall, but the volume on advancing issues was barely higher than volume on declining issues. This points to a similar effect as if the market was “spinning its wheels.” In other words, there was a lot of fuel there, but the market really didn’t go anywhere. Do you see why I hypothesized that yesterday was marked by institutional selling? Hopefully, you are beginning to realize the importance of really analyzing volume on a daily basis because it gives you clues as to the health of the market that you might not otherwise notice.

Going into today, I basically have a neutral stance on the markets because we have a mixture of both bullish and bearish signals. As such, I feel that caution is in order on both the long and short side today. As explained above, yesterday’s volume pattern, along with the relative weakness and divergence in the Dow, both cause me to be extra cautious on the long side right now. However, the Nasdaq has been very strong and is sitting at a new 52-week high. When the major indices get out of sync with each other, as they are right now, it often becomes choppy and volatile in the broad market and trading can become quite tricky.

If you want a clear and simple chart to watch for clues about the direction of today’s session, consider watching an hourly chart of the major indices. Unlike the shorter term intraday chart intervals, the hourly charts remove the “noise” and give you a concise picture of what is happening and is an ideal time frame to watch for multi-day “swing” trading. Looking at the hourly charts of the major indices, you will notice that an uptrend line has developed over the past few days, beginning with the July 1 lows. To illustrate this, I have drawn the trendline on an hourly chart of DIA (you can draw a similar trendline on charts of both QQQ and SPY):

As long as the lower channel support of the uptrend line (labeled above) remains intact, your odds are better on the long side of the market. However, if support of the hourly uptrend line on ANY of the major indices becomes broken today, we could see a significant selloff. For easy reference, you may wish to simply follow the 20-period moving average on the hourly charts of the major indices because the 20-MA is converging with the trendline support on most of the indices. By the way, you will notice on the chart above that I have ignored the spike down on the morning of July 3 because that sharp selloff and the long tail it created was due to an errant sell order and is not very significant with regard to our trendlines.

Just as a heads-up, Yahoo! and Genentech both report earnings after the close today, so be aware of that if you have any positions in their respective sectors. Wholesale Inventories report is due at 10 am EST today and Jobless Claims will be reported tomorrow, before the open. Stay nimble out there and remember to TRADE WHAT YOU SEE, NOT WHAT YOU THINK!

Today’s watch list:

DIA – DIAMONDS (Dow Jones Industrial Average Index Tracking Stock)

Trigger = below 91.87 (below the hourly trendline support and 20-MA)
Target = 90.80 (50% Fibo retracement from July 1 low to July 8 high)
Stop = 92.30 (above the 20 and 40-MAs on 15 min. chart)

Notes = Looking to short the Dow on a break of hourly trendline support based on its recent relative weakness. However, there is support not too far below, so we don’t want to get greedy on this one. In case DIA gaps down below its trigger price, remember the MTG Opening Gap Rules so that you do not short unless it breaks the low of the first 20 minutes.

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 (1/2 position from June 30) –
    bought 7.30, sold 8.04, points = + 0.74, net P/L = + $284

    SPY long (1/2 position from July 7) –
    bought 99.89, sold 100.61, points = + 0.72, net P/L = + $69

Open Positions:

    WMH long (from July 7) –
    bought 40.51, new stop at 40.30, target at 42.60, unrealized points = + 0.25, unrealized P/L = + $22


We took profits on the rest of the EWJ position yesterday because we feel the Nikkei is due for either a price retracement or correction by time. However, we remain very bullish on Japan over the intermediate term and will be watching closely for a re-entry point on EWJ long. Our only open position now is WMH long; note that we have raised the stop to just below the low of the past two days.

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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