As anticipated per the analysis in yesterday’s Wagner Daily, the broad market broke out of the three-day consolidation pattern yesterday and provided traders with solid intraday trading opportunities because the broad market trended smoothly. The major indices began the day with a large opening gap down that caused the S&P, Dow, and the Nasdaq to each open at the lows of the previous day. After being unable to recover and “fill the gap” going into the first reversal period at 9:50 am EST, the major indices soundly broke to new intraday lows, setting in motion a smooth and steady intraday downtrend that remained intact until around 3:15 pm EST. This enabled us to profit from both an intraday short in QQQ (Nasdaq 100 index) and an overnight short in HHH (Internet HOLDR). Modest buying activity was seen during the final hour of trading, which caused each of the major indices to retrace and close between 38.2% and 50% above the lows of their respective intraday ranges (not including the gap). In other words, we simply saw a Fibonacci price correction into the close. Unlike previous days, the Nasdaq traded in sync with both the S&P and Dow, even showing relative weakness at several points throughout the day. It is not surprising to see some sector rotation out of the Nasdaq since that index has been leading for such a long period of time.
Although the “talking heads” were blaming yesterday’s decline on the earnings report by Yahoo!, the reality is that Yahoo! was merely a convenient excuse for the technical indicators. We know that the selloff was actually caused by the volume distribution pattern on both Tuesday and Wednesday, which pointed to the probability of a selloff yesterday. But, it always helps when there is a scapegoat such as a corporate earnings report.
Despite losses of 1.3% in the Dow and S&P and 1.8% in the Nasdaq, yesterday’s selloff was actually on relatively light volume. Total volume for the NYSE was nearly 10% lighter than the previous day, while volume for the Nasdaq was almost 19% lower. This is important because it indicates that yesterday’s selloff was not a mass exodus by institutions to close their long positions. It was basically an orderly selloff, as opposed to panic selling. But, then again, many of the institutions who wanted to sell had already done so during the prior two distribution days. Not surprisingly, declining volume outpaced advancing volume by approximately 5 to 1 yesterday.
The Nikkei index finally had a significant price correction overnight and closed more than 3% lower on the day. This means that EWJ is likely to gap down today as well. As you know, we have been looking for a re-entry point to buy EWJ, ever since we sold it at the beginning of the week for an 11% gain. Ideally, we would like to see both the 20-day moving average and the lower channel support of the daily uptrend line rise up to provide price support to EWJ. I have drawn the uptrend line on the daily chart of EWJ below:
As you can see, the 20-day MA and uptrend line are currently around the 7.50 area, but I don’t think we will see that much of a retracement in EWJ (which would be a 61.8% Fibo retracement off the most recent rally). So, perhaps EWJ will trade down to the 7.80 area and hang out there for a few days, correcting by time. That would allow the trendline and moving average to rise up and provide support, even if EWJ did not retrace all the way down to the 7.50 area. We will be stalking EWJ for an entry, so keep a close eye on it. As always, we will send an e-mail alert if/when we decide to jump back in.
Bringing it back home, the U.S. markets are likely to be choppy today. Both SPY (S&P 500 Index) and DIA (Dow Jones Industrials) are now back below their 20-day moving averages again. However, QQQ (Nasdaq 100 Index) is still above it. Yesterday’s selloff was important because it prevented both the S&P and Dow from breaking above their prior highs that were set in mid-June. As such, we now have a lower high on the daily charts of the S&P and Dow that was formed from the rally at the beginning of the week. This marks the first time since the rally began on March 12 that one of the major indices has not been able to set a new high after a price correction. While it is certainly an important warning sign, there are still too many bullish signals that indicate the rally is probably not over. Most important of those signals is that each of the major indices are still trading above their closely-watched 50-day moving averages and the broad market is still well above the prior “swing low” that was set on July 1. As long as the July 1 lows remain intact, the market is in no real danger of falling apart. But, if the prior lows become broken, we could be in for a significant price correction. For now, yesterday’s closing prices put the major indices back in last week’s “chop zone,” so it could become choppy today as well. It’s also a Friday, so it’s difficult to say how traders will want to position themselves ahead of the weekend. Just take it easy today and we will let the market show us its next move and simply react in either direction. We are cash for now and it feels good!
Today’s watch list:
The only swing trade setup we are watching for today is a possible long entry in EWJ. As explained above, we want to see how it settles after yesterday’s drop in the Nikkei. Will send an e-mail alert if/when we take a position in it.
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
We had two profitable trades in the ETF Real-Time Room yesterday (HHH and QQQ short), but they will be reported in the next weekly newsletter. There are no open positions from The Wagner Daily.
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)
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