The Wagner Daily


Well, there really isn’t much to say about yesterday’s market action. Each of the major indices spent the entire day in a very narrow and sideways trading range, consolidating near their respective previous day’s highs. It was a boring day for trading the broad market because the S&P futures spent the entire day in a tight six-point range, while the Nasdaq futures oscillated in an equally narrow 10-point range. Volume declined for the third consecutive day in both the NYSE and Nasdaq, which accounted for the lack of direction. Breadth and most market internals were relatively flat today.

Although not much can be read into yesterday’s trading session, I would tend to say that it was more bullish than bearish because the broad market basically held onto the previous day’s gains and corrected by time. SPY (S&P 500 Index) closed slightly negative on the day, but still closed within the upper third of last Friday’s range, which is mildly bullish. In addition, SPY found intraday price support just above its 20-day moving average, which is a key support/resistance level to watch right now. DIA (Dow Jones Industrials) attempted to break above its resistance at 93 yesterday, but the breakout quickly failed, stopping us out for a small loss. Like SPY, the Dow (and DIA) also closed near its previous day’s high. QQQ (Nasdaq 100 Index) was the only one of the three major broad-based ETFs that closed above last Friday’s high, but only by a fractional margin. Relative strength was clearly seen in IWM (Russell 2000 small-cap index), which closed nearly one percent higher on the day. As is often the case, the Nasdaq showed relative strength in sync with the Russell.

As we discussed in yesterday morning’s newsletter, light volume and range-bound days are common during this time of year and we would not be surprised to see it continue until after the Labor Day holiday has passed. Therefore, it is very important to recognize that the overall market conditions have changed during the past month and adjust your trading style accordingly. If you attempt to trade the current market in the same manner that you did during the March to June rally, you will undoubtedly subject yourself to losses that can easily be prevented by making a few changes in your style. So, what can you do to adapt? It depends on whether you are a day trader or a longer-term “swing” trader. Let’s look at a few ideas for both types of traders.

For those of you who trade the markets intraday, the most obvious and lowest-risk thing to do is simply sit on the sidelines and wait it out. Like much of Wall Street, consider taking a long vacation if you are able. The market will certainly be here when you return. However, if you insist on actively trading, consider shifting your focus away from trading the broad-based ETFs such as SPY or QQQ, and instead concentrate on trading only the sector ETFs that are showing relative strength or weakness to the broad market each day. Regardless of how flat the broad market may be, there are always individual sectors such as the Semiconductors or Biotechs that are either outperforming or underperforming the major indices. If you have not already done so, I recommend you set up a quote list of the sector ETFs you trade most commonly. Here is a screenshot of the one I use on my TradeStation platform:

On the screen shot above, notice that I keep the sector ETFs dynamically sorted by percentage change from the previous day’s close. This provides me with a quick overview of which sectors may be potential plays. For example, BBH (Biotech HOLDR) closed 2.38% higher yesterday, but XLF (Financials) closed 0.38% lower. Notice that I also track each ETF’s intraday volume compared to its average daily volume (based on the past 50 days). As volume always does, this confirms institutional sector rotation and money flow out of one sector and into another. Obviously, your goal is to buy the sectors with relative strength and/or short those with relative weakness. By overlaying an intraday chart of each sector ETF with a chart of the S&P futures, you can clearly see which sectors have the most relative strength or weakness.

If, on the other hand, you initiate trades with a multi-day time horizon instead of intraday, one helpful thing you may consider doing is focusing less on studying daily charts and more on the longer-term weekly charts. During times of choppy and narrow trading ranges, the daily charts tend to display a lot of “noise” that can generate faulty buy or sell signals. However, the weekly charts remove the erratic price action of the daily bars and allow you to see a much more accurate and true picture of what is really happening. As an example, compare both the daily and weekly charts of SMH (Semiconductor HOLDR) below:

On the daily chart of SMH above, notice how erratic the price action of the past several weeks has been. Most likely, you would have been stopped out numerous times if you were attempting to take a long position based on the daily chart. However, in contrast, take a look at the weekly chart of SMH below:

Notice how much smoother the uptrend appears on the weekly chart. The choppiness of the past few weeks appears as simply a bullish consolidation at the highs instead. If you used a weekly chart to set your stops, you would be giving the trade more “wiggle room,” but you would also be shooting for larger profits and are less likely to get stopped out on a little shakeout. So, my point is that you may wish to consider lengthening the average duration of time for your trades. If you typically remain in a trade for a few days and use relatively tight stops, consider focusing on trades with a time horizon of several weeks and use looser stops and larger profit targets instead. Because this would obviously cause you to incur more risk, you can compensate for that by simply reducing your share size on these trades. I have personally found weekly charts to be a great way to trade narrow and range bound markets in the past, but there are obviously some position management adjustments that need to be made first.

Today’s watch list:

SMH – Semiconductor HOLDR

Trigger = above 33.05 (above prior “swing” high)
Target = 35.90 (upper channel of weekly uptrend)
Stop = 32.40 (below yesterday’s close)

Notes = SMH has been consolidating and is poised to breakout to new highs.

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:

    DIA long (half position from July 28) –
    bought 93.07, sold 92.66, points = (0.41), net P/L = ($44)

Open Positions:

    EWJ long (full position from July 15 – 17) –
    bought 7.81 (avg.), new stop at 7.45, target of 8.80,
    unrealized points = (0.01), unrealized P/L = ($19)


DIA triggered per yesterday’s newsletter, but we were stopped out when the breakout failed. Only open position is EWJ long.

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