The Wagner Daily


Just like the previous day, the major indices began yesterday with a strong opening gap up, but the gap failed to hold and started an intraday downtrend that remained intact until the final fifteen minutes of trading. Unlike the previous day, yesterday’s gap was quickly closed during the morning, whereas the July 14 gap was not closed until the final hour of trading. Regardless, it was the second consecutive day in which the broad market failed to hold onto significant opening gains, indicating the likelihood of institutional selling into strength. This is further confirmed by the fact that yesterday’s volume in the NYSE was nearly 12% higher than the previous day, but both the S&P and Dow closed lower on the day. When the broad market closes lower than the previous day on higher volume, it meets the technical definition of a “distribution day,” which is often a bearish warning signal, especially if the market sees several consecutive distribution days. However, the Nasdaq did not confirm the distribution day because volume was 3% lighter in the Nasdaq Composite, which only closed one point lower than the previous day. At least there were not any “errant sell orders” in the futures markets yesterday! The chart of the S&P futures below illustrates how the opening gap failed the two days, as well as the intraday downtrend that formed yesterday:

The Home Building sector ($DJUSHB) was one of the weakest sectors yesterday, closing nearly 5% lower. Although there is not an ETF for that specific sector, several of our ETF Real-Time Room subscribers profited from creating their own ETF through buying small share size of the top leaders of the sector (BZH, RYL, TOL, KBH, LEN, PHM, HOV). If you have a broker who only charges you a penny or so per share, you can buy 100 shares of 7 different stocks for less than $10 in commissions. Other sectors that were weak yesterday included the bond ETFs (such as TLT and IEF), Utilities (UTH), and Pharmaceuticals (PPH). The Biotechs (BBH) and Semiconductors (SMH) both showed relative strength yesterday and both ETFs closed at new 52-week highs.

As you probably know, Intel (INTC) reported earnings after the close yesterday and the initial after-hours reaction to both the price of Intel stock and the futures markets was positive. This is likely to cause yet another strong opening gap up today, but we will see if the broad market is able to hold the gap this time. Unfortunately, trading during a major earnings week, such as the one we are in, is often more challenging and riskier because technical analysis has a tendency to be overruled by fundamental news, of which the market’s reaction is often difficult to predict. Case in point is the trade we initiated in SMH (Semiconductor HOLDR) yesterday.

Like the past several days, the Semiconductor Index (SOX) was showing a lot of relative strength yesterday morning, so we decided to stalk SMH (Semiconductor HOLDR) for the proper entry point to buy a position. Since stocks and indexes that break to new 52-week highs typically go much higher due to the lack of overhead resistance, we set a buy stop to buy SMH just over resistance at 32.50, which also represented a new 52-week high. SMH did indeed break out and the trade initially looked good, but pre-earnings jitters over Intel caused the SOX index to weaken and SMH failed the breakout. Because failed breakouts can often reverse fast and furiously, we kept a tight stop on SMH and bailed out with only a 23 cent loss. Needless to say, “The Street” seemed to like Intel’s report after the close and SMH will probably gap up about a point higher than where we bought it yesterday. But, there’s not much you can do about it. That’s just an example of why trading during a major earnings week can be so difficult; the setups may be good, but sitting through the wiggles is not easy to do and is often too risky as well. You cannot ignore stop prices just because of being in earnings week. Anyway, you could look to buy SMH if it holds the breakout today, but I would only buy the gap if it holds into the first hour of trading.

If you take a look at daily candlestick charts of the major indices, you will see lots of tails on both sides of the candlesticks, indicating a lot of indecision at the current price area. The Dow (DIA) actually sold off below its 20-day moving average yesterday, but recovered to close just above it. I still contend, as I mentioned yesterday, that we will see a big move in one direction or the other very soon. I feel this way because the indecision will soon resolve itself and all those traders who made bets on the opposite side of the market will be forced to close their positions, thereby causing an even stronger move in the direction of the trend. The hard part, however, is determining whether we see a major correction or yet another leg higher.

Although we could look at a bunch of trendlines, moving averages, Fibonacci, and whichever technical indicators you prefer, the bottom line is that the direction of the market during the remainder of this week is likely to be determined by the market’s reaction to the plethora of earnings reports that are scheduled to be released this week. IBM is scheduled to report after the close today and it will certainly be a market mover, one direction or the other. Other big tech names reporting after the close today are Apple (AAPL) and QLogic (QLGC). In the non-tech arena, Kraft Foods (KFT), Allstate (ALL), and Capital One Financial (COF) are all reporting after the close today as well. There are also a bunch of companies reporting before the open tomorrow (click here to view the full list on the Yahoo! Finance web site).

Today’s watch list:

OIH – Oil Service HOLDR

Trigger = above 57.80 (above first hourly trendline resistance)
Target = 59.80 (just below 20-day MA)
Stop = 56.80 (below July 15 low)

Notes = OIH has sold off down to both its 200-day moving average AND the lower channel support of its weekly uptrend line. This should provide support for OIH and cause a bounce to its 20-day MA.

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:

    SMH long (HALF position from July 15) –
    bought 32.60, sold 32.37, net points = (0.23), net P/L = ($39)

Open Positions:

    EWJ long (HALF position from July 15) –
    bought 7.97, stop at 7.50, unrealized points = (0.09), unrealized P/L = ($36)


Per an intraday e-mail update, we bought SMH yesterday, but were stopped out (see commentary above). We also bought our first partial size of EWJ yesterday and will be stalking it for an entry point for the second half of the position. Ideally, we would like to see it pull back a little further, although it may just correct by time and trade sideways. Either way, we will send an e-mail alert when/if we buy the second half of the position.

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