The Wagner Daily


Not surprisingly, the euphoria over Intel’s earnings was short-lived.
For the third consecutive day, the futures markets began with a large opening
gap up over the previous day’s close, but the gap was filled. The major indices
dropped from the opening gap quickly and sharply, bottoming out just after 11 am
EST. The broad market subsequently spent the rest of the day in a narrow range,
chopping around near the lows. Because the initial morning selloff was so sharp,
the sideways trading in the afternoon enabled the 20-period moving average on
the 15 minute chart to eventually descend and meet the price of the S&P
futures. This is simply known as a correction by time. Each of the major indices
closed lower on the day, but the Nasdaq again showed relative strength. Why did
I say it was not surprising that the excitement over Intel faded so quickly? If
you have been paying close attention to the warning signals we have been
discussing in The Wagner Daily over the past few days, there were three
very important signals: distribution volume, double top in the S&P futures
(at 1014.80), and consecutive failed gaps. Let’s first review the distribution
volume pattern, the most important of those two signals.

Our first
warning sign that the market was poised for lower prices occurred when the NYSE
had a distribution day on July 15. A “distribution day” is defined as a day in
which the price of an index or stock closes lower than the previous day, but on
higher volume than the previous day. When this occurs, it typically indicates
that institutions are selling into strength because institutions generally
account for 80% or more of the market’s daily volume. While an up day on higher
volume is bullish because it indicates that institutions are rushing to buy, a
down day on higher volume is equally as bearish because it indicates the
opposite. Not surprisingly, yesterday was also a distribution day in both the
NYSE and Nasdaq, marking the second consecutive day of distribution for the NYSE
and the first in the Nasdaq. If you fail to pay attention to volume patterns,
you will be among those who are left “holding the bag,” long after the
institutions have already sold their positions. Long-term subscribers to this
newsletter know that I place a lot of importance on daily volume patterns in the
broad market because volume is the most reliable leading technical indicator at
your disposal. If I had no charts, I could still make profitable trades as long
as I was able to closely follow price and volume action. While charts show you
what has already happened and can help to predict likely support and resistance
levels, volume shows you what is really happening beneath the surface. When all
the charts look bullish, a close look at volume will sometimes reveal a
completely different story and the best part is that volume is a leading
indicator of price, rather than a lagging indicator.

Another important
warning signal we discussed in yesterday’s newsletter was the fact that the
major indices gapped up significantly during the previous two days, but the gap
failed to hold both days and the broad market closed near the lows. This was
telling me that the professionals were selling into the strength of the gap
because not only did the gaps become filled, but the market broke below the gap
both days. Yesterday, for the third consecutive day, we saw the same pattern
again! Though it’s not obvious, don’t ignore this signal. If the market gaps up
sharply for three days in a row, but fails to hold the gap all three times,
think about what that is telling you! To me, it’s almost like the broad market
is screaming at me “Hello, just to let you know, I’m not able to sustain a rally
here, so you may want to get short or close your long positions.” Again,
trendlines and support/resistance levels are important, but there are sometimes
more important psychological indicators that are not as obvious.

reported earnings after the close yesterday. Unlike Intel, which generated
excitement and strength in the after-hours market, IBM had the opposite effect.
As of the time of this writing, the pre-market S&P futures are down nearly
1% and the Nasdaq is down a bit less than 2%. Why is it that Intel’s earnings
generated so much excitement, but IBM’s report generated fear, even though both
companies met their estimates? It’s simple — psychology of the masses! When
everyone saw that Intel’s report was not able to hold up the market yesterday,
what is going to be the expectation going into today after IBM’s report?
Obviously, people are going to expect more selling, so we now have the opposite
effect of the Intel report, despite a decent report from IBM. Furthermore,
market cycles tend to go in periods of three days. Since the past three days
consisted of a large gap up and then selloff, it seemed likely to me that today
would be the opposite effect. . .gap down and. . .possible bounce?

into today, keep a close eye on the daily charts because the S&P barely
closed above its 20-day moving average, which is a closely watched indicator.
The Dow, on the other hand, closed below its 20-day moving average yesterday.
Assuming the futures gap down today, the S&P will also open below its 20-day
moving average, while the Nasdaq still remains above it. The major indices are
dangerously close to breaking support of the lower channel of their uptrend
lines, beginning with the lows of March 12. I recommend you draw trendlines from
the March 12 lows, connecting with the lows of July 1, in each of your favorite
indexes and/or stocks. If the index or stock you are following breaks that
trendline, you should definitely take profits on any long positions and consider
getting short as well. I still think the market goes higher in the intermediate
term, say over the next six months, but it appears that the market is going to
take a rest and correct a little bit here. We don’t care either way because we
will simply trade in the direction of the trend until the trend changes.

Today’s watch list:

OIH – Oil Service HOLDR

Trigger = above 56.80
(above first hourly trendline resistance)
Target = 58.70 (just below
secondary trendline resistance)
Stop = 56.00 (below July 16 low)

Notes = We were stalking this play for an entry yesterday, but it did
not trigger per our original trigger price. So, we have lowered the trigger
price and are looking for an entry today.

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 (3/4 position size from July 15 and 16) –
    bought 7.90 (avg.),
    new stop at 7.40, unrealized points = (0.19), unrealized P/L = ($121)


Per an intraday e-mail update, we added to
EWJ yesterday as we continue building a bullish “long-term” position in the
Japanese markets.

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