The Wagner Daily


The trading range in both the S&P and Nasdaq futures continued yesterday, albeit with a bit more intraday volatility. Although the major indices began the day with a small gap up on the heels of the previous day’s consolidation, the opening strength was short-lived. A weaker-than-expected Consumer Confidence number that was released at 10 am EST caused the broad market to quickly sell off below the previous day’s range and into the middle of last week’s trading range. As the day progressed, the major indices found support and sharply reversed the morning selloff as the session entered the mid-day doldrums. This was driven, in part, by rumors, and only rumors, that the U.S. had captured Saddam Hussein. Nevertheless, it was enough of an impetus to cause the major indices to rally back up to their prior intraday highs before the broad market began drifting lower again during the late afternoon. The Nasdaq finally closed in the middle of its intraday range, while the S&P and Dow closed in the lower end of their intraday ranges. It was quite a roller coaster ride on an intraday basis, but the longer term charts illustrate that nothing really happened once again. The trading range simply continued for yet another day. Below is an hourly chart of SPY (S&P 500 Index) that simply illustrates the clear lack of direction over the past several weeks:

Since total market volume increased by more than 10% in both the NYSE and Nasdaq and the major indices each closed negative on the day, yesterday met the strict technical definition of a “distribution day.” However, I would not place too much emphasis on it because the the Nasdaq closed only 0.23% lower. In addition, many leading stocks within the top sectors continued to show relative strength yesterday, which is bullish. The small caps (IWM) and mid caps (MDY) even closed slightly positive on the day. The biggest drag on the broad market was the S&P 500 Index, which closed 0.73% lower — still nothing too significant at this point. Breadth was slightly negative in the NYSE as decliners outpaced advancers by 2 to 1, but was nearly flat in the Nasdaq. While yesterday’s distribution day is a yellow flag to the bulls, it is difficult to put much weighting on that one indicator unless the broad market confirms the weakness by finally breaking down below the multi-week trading range. For now, we have to assume the trading range will continue for a while longer until the market proves otherwise.

In yesterday’s Wagner Daily, I discussed the importance of adapting your trading style based on changing market conditions. In particular, I provided you with several specific ideas for how to more easily profit from the broad market’s current sideways trading range. As you may recall, I suggested that two of the most important things you can do are to first focus on trading individual sectors rather than the broad market and second to shift to a longer time horizon for your swing trades. Today I want to discuss one additional modification that is required in order to profit from trading range-bound markets.

Perhaps the most important modification you can make to your trading style right now is to stop attempting to buy breaks of resistance and short the breaks of support. While buying breakouts and shorting breakdowns usually works well during a trending market, the technique is usually not very successful during periods of consolidation or range-bound trading action. Simply put, both breakouts and breakdowns have a common tendency to fail and create false signals during times of non-committal trading. This means that you will often find yourself buying at the top of a rally or shorting the bottom of a selloff, only to find the position immediately reverse against you. Therefore, a contrary approach is required to increase your odds of profitability.

Rather than buying the breakouts and shorting the breakdowns, you simply want to do the opposite. When an index or sector has rallied into a key resistance point, sell short into that resistance. If an index has sold off and it looks like it may break a key support level, buy the selloff instead of shorting it. We do this because we have to assume the sideways trading range will continue bouncing between its support and resistance levels until the market proves otherwise. So what if the market decides to finally break out of its range during that one time you are shorting the rally into resistance or buying the selloff down to support? No big deal! That’s what stops are for! Besides, the nice thing about this technique is that it enables you to place tight stops just above or below your entry point because you want to be out right away if the breakout or breakdown is for real. This means that your loss will be relatively small if you are wrong. And, if you are right, you will have bought or shorted at the exact right moment in order to profit from the market’s next oscillation within the trading range. Regardless, we still recommend you trade with reduced share size until the market breaks out of its range because there is no reason to be aggressive in the market right now during the summer doldrums.

Today’s watch list:

There are no new plays for today, but we are long SMH and EWJ from overnight. As always, we will send an e-mail alert if we enter any new swing trades, but it is not too exciting with the current trading range. For now, we are watching BBH (Biotech HOLDR) for a possible breakout to new highs and are watching OIH (Oil Service HOLDR) for a potential bounce off the lower channel of its daily downtrend. But, neither of those are clear trade setups yet.

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:

    SMH long (from July 29) –
    bought 32.35, new stop at 31.35, target of 35.90,
    unrealized points = (0.15), unrealized P/L = ($49)

    EWJ long (full position from July 15 – 17) –
    bought 7.81 (avg.), new stop at 7.45, target of 8.80,
    unrealized points = (0.11), unrealized P/L = ($99)


SMH long triggered per yesterday’s newsletter. Per an intraday e-mail update, we used a lower entry point and have adjusted the stop accordingly. We remain long EWJ, though we may lighten up on partial share size of the position, depending on how it acts today. We will send an e-mail alert if we do.

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