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The Wagner Daily


The major indices continued their pattern of doing virtually nothing as the S&P once again traded in an extremely narrow range of less than five points for a majority of the day. Reflecting that activity, yesterday’s intraday trading range in SPY (S&P 500 Index) was only 86 cents from the low to high of the day. The last time SPY traded with less volatility was back on May 23, at which time SPY traded within an 84 cent range. The Dow and Nasdaq both traded in a narrow range as well, but relative weakness could be seen in the Nasdaq. The Nasdaq Composite closed 0.6% lower yesterday, the S&P closed 0.2% lower, and the Dow closed basically flat on the day. Volume was nothing to write home about either, coming in 7% lower in the NYSE and more than 10% lower in the Nasdaq. There were a few pockets of mild strength in the broad market, particularly within the Pharmaceuticals (PPH) and Oil Service (OIH) sectors. As such, we took long positions overnight in both sectors in anticipation of follow-through to the upside today. But, there were certainly no plays in the broad-based ETFs such as SPY yesterday. Overall, it was definitely one of the most boring trading days I have seen in a long time!

As many of you may know, periods of extended volatility contraction eventually lead to a big move in one direction or the other. Looking at a weekly chart, you will see that the S&P has been in a period of sideways range contraction for the past eight weeks. The daily chart of the S&P shows how the 20 and 50-day moving averages are slowly converging on the price as well. This building of an extended base and volatility contraction is similar to compressing a coil or spring in that the more you compress the spring, the more force you are creating and the higher it will bounce. You can essentially think of each additional week of sideways trading as if you are compressing the spring gradually a bit more. Eventually, when the spring is released, the market will make a sharp move, but the question remains of which way it will go. Either way, the move will be substantial because traders have been placing bets during the past eight weeks as to which direction the next move will be. All those who end up being on the wrong side of the market will be simultaneously forced to close their positions, adding even more pressure to the move. That is why extended periods of volatility contraction and range-bound trading typically lead to a big move in one direction or the other.

Which way will the broad market go upon breaking out of the consolidation? We can only harbor an educated guess at this point because there are too many mixed signals. Since the consolidation is occurring in the upper third of the multi-month rally, correcting by time, I would tend to believe that the next significant move will be higher because of the lack of overhead resistance and solid weekly charts. In addition, support of both the 50-day and 20-week moving averages are still below the prices of the major indices. However, the major indices have yet to make a Fibonacci correction to the downside, so we could just as easily see that occur as well. To further complicate the matter, we are in a traditionally slow period of trading known as the summer doldrums. This is the period from July through the end of August in which many big traders are not present because they are on holiday. When they return, it will be interesting to see if the volatility increases once again.

The next two days are filled with a plethora of U.S. economic reports and data that could provide the impetus for the market to break out of its narrow range. Jobless claims and GDP are both due to be released at 8:30 am EST today, while Chicago PMI will be released at 10 am EST. There are a whopping nine different economic reports that will be released tomorrow. Click here to see a calendar with a complete overview of tomorrow’s reports. Most importantly, stay nimble out there and be ready for a big move in either direction. If you currently have open positions, be ready to cut your losses on any losing trades quickly if you are proven to be on the wrong side. Remember you can always re-enter your positions if you still like them, and probably at a better price than if you didn’t cut the loss quickly.

Today’s watch list:

Since we currently have three open positions, there are no additional plays on today’s watch list. We will instead focus on micromanaging these positions. See the Daily Reality Report below for important notes on open positions.

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:

    PPH long (from July 30) –
    bought 76.79, new stop at 76.40, target of 78.25,
    unrealized points = + 0.39, unrealized P/L = + $39

    SMH long (from July 29) –
    bought 32.35, new stop at 31.50, target of 35.90,
    unrealized points = (0.55), unrealized P/L = ($165)

    EWJ long (full position from July 15 – 17) –
    bought 7.81 (avg.), new stop at 7.43, target of 8.80,
    unrealized points = (0.11), unrealized P/L = ($216)


Per an intraday e-mail alert, we bought PPH yesterday and took it overnight. We also remain long SMH with a slightly tighter stop of 31.50. Finally, we are still long EWJ, which got whacked a bit yesterday. EWJ is approaching our stop, but we still don’t really think EWJ will go much lower over the next six months to a year. But, we will honor the stop if it gets hit and will look for better re-entry point below that price. I remain just as bullish on Japan and the Nikkei now as I was several months ago. It’s just that EWJ is seeing a price correction and our timing on the re-entry was not the best.

FYI, we also took OIH long and IWM short overnight, per a call in the ETF Real-Time Room. Just passing this information on as a courtesy to non-subscribers of the ETF Real-Time Room. P/L from all trades called in the real-time room will be reported, as always, in the next weekly letter. Click here if you only subscribe to The Wagner Daily, but would like a free trial to the ETF Real-Time Room.

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

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