The Wagner Daily


Just as we have been anticipating, the recent volatility contraction in the broad market led to a big move and break out of the narrow trading range yesterday, although looking exclusively at the closing numbers does not portray an accurate picture of what really occurred. Several key U.S. economic reports yesterday morning, including Jobless Claims, GDP, and PMI, all came in better than expected, pointing to a recovering economy. The combination of these positive reports was enough of an impetus to cause the major indices to rally sharply, consequently breaking out of the recent consolidation zone. The rally was broad-based and just about every sector participated. At the intraday highs in the late morning session, the Dow was trading 1.8% higher, the S&P was 1.7% higher, and the Nasdaq Composite had rallied more than 2% over the previous day’s close. Most importantly, volume was significantly stronger than the previous day, confirming the validity of the rally. Upon peaking at their intraday highs, the major indices traded perfectly sideways for the next several hours, consolidating and correcting by time. Based on the high volume breakout of the trading range, the wide breadth of the rally, and the perfect consolidation at the intraday highs, odds were pretty good that the market would make another rally attempt into the close and probably close near the highs. However, equally broad-based selling that began 90 minutes before the close hit the market with full force and continued right up until the closing bell. This resulted in a closing gain of only 0.8% in the Nasdaq and a measly 0.3 gain in the S&P. Although the market gave back most of its intraday gains, it was definitely nice to have volatility return to the markets and it enabled us to profit solidly from intraday trading.

Those of you that have been trading for a long time will probably agree with me that yesterday’s selloff into the close was very unusual due to the multitude of reasons the market was likely to close near its intraday highs instead. Nevertheless, yesterday was a great reminder that “anything can happen” in the market, regardless of how good you feel about a particular trade. It was also a good lesson in the importance of always using trailing stops to protect gains in open positions. We had a rather profitable day yesterday and netted multiple points through the combination of selling OIH, PPH, and SMH. However, we would have given all the unrealized gains back if we had not utilized a methodology of continually trailing stops higher throughout the day. Trailing stops are great because they allow you to ride out the profitable positions and maximize your gains, but simultaneously have the extremely important benefit of locking in gains along the way in case your position reverses, which is what happened yesterday. Remember that actively micro-managing open positions is usually more important to your bottom line results than simply picking the right stock or ETF, especially on days like yesterday.

To be honest with you, I don’t really know what to make of yesterday’s selloff. It seemed to appear from out of nowhere and occurred without any significant news events. Several possible explanations for the selloff include: end of month program selling, nervousness about the vast array of economic numbers due out today, or perhaps the sudden rise in the yield of the 10-year note during the final hour of trading. Most likely, it was due to a combination of these three factors, but the one certainty is that chart analysis did not predict such a move. Total volume in the NYSE yesterday was 24% higher than the previous day, while the Nasdaq showed an increase of nearly 20% over the previous day. If the major indices would have closed near their intraday highs, I would have said that the sharp increase in volume is quite bullish. However, the selling volume during the final ninety minutes of trading appeared to be equally as heavy as the morning increase in volume while the market was rallying. Therefore, I am not really impressed by the increase in volume because it was hardly how we would expect the market to close if it was technically acting well. In fact, the S&P came rather close to closing in the red, which would have technically indicated a “distribution day” if that would have occurred.

Unfortunately, yesterday afternoon’s selloff caused the S&P to once again close right in the middle of the recent “chop zone” of consolidation. On the chart below, notice how the S&P futures initially broke sharply above the consolidation, breaking the psychological resistance of 1000, but then sold off to close within the trading range of the previous week:

Like the S&P, the Dow and the Nasdaq also both closed within their previous trading ranges. What does this mean going into today? I have no idea! The bulls were definitely in charge yesterday morning, but the bears were equally in control during the afternoon session. This tells us that the recent indecision we have been seeing is obviously still prevalent. The “doji star” candlestick on the daily chart of QQQ (Nasdaq 100 Index) below indicates yesterday’s indecision:

From a technical perspective, the charts are really messy going into today. Even if the market attempts to rally today, there is now a bunch of overhead resistance that was created by the bulls who did not sell their long positions when the market headed South in the afternoon. Therefore, any rally attempt is likely to be met by sellers, making it difficult to find a low-risk entry point on the long side. However, there certainly is no reason to be bearish right here either because the major indices are in the middle of the range. So, I guess it is back to the same plan we had before: avoid trading the broad-based ETFs and continue trading individual sectors that are showing relative strength or weakness to the broad market. Either that or let the market digest the flood of economic numbers due out this morning and take a 3-day weekend. There are NINE different economic reports due out this morning. Click here to view a list of these reports, as well as the consensus expectations. Have a nice weekend.

Today’s watch list:

There are no clear trade setups for today, but we will send an e-mail alert intraday if we enter any new swing trades.

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:

    PPH long (from July 30) –
    bought 76.79, sold 78.12 (avg.), points = + 1.33, net P/L = + $130

    SMH long (from July 29) –
    bought 32.35, sold 32.67 (avg.), points = + 0.32, net P/L = + $87

Open Positions:

    EWJ long (full position from July 15 – 17) –
    bought 7.81 (avg.), new stop at 7.43, target of 8.80,
    unrealized points = (0.21), unrealized P/L = ($168)


We scaled out of both PPH and SMH yesterday, locking in solid gains thanks to the use of trailing stops. Our only open position is now 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