--> The Wagner Daily

The Wagner Daily


Commentary:

As
you probably know, the broad market sustained rather substantial losses
yesterday in a selloff that was widespread amongst all the major indices and
individual market sectors. Despite the bullish reversal pattern that formed the
previous day, the major indices and many formerly leading stocks were unable to
follow-through to the upside due to the perfect overhead resistance of the key
moving average levels we discussed in yesterday’s newsletter. These were the
50-day moving average of the S&P and the 20-day MA of the Nasdaq, both of
which perfectly marked the highs of the rally on August 4. Although each of the
major indices were weak yesterday, relative weakness was once again prevalent in
the Nasdaq. The Biotech, Semiconductor, Software, Networking, and Internet
sectors were all hit pretty hard, unlike prior down days when pockets of
strength could still be found in the Nasdaq. The Nasdaq Composite closed 2.37%
lower yesterday, but the Nasdaq futures were hit with a subsequent wave of
selling after-hours upon the release of Cisco’s earnings report. Since the
Nasdaq Composite stops trading at 4:00 pm EST, the further losses were not
reflected, but the Nasdaq Futures (which tracks the Nasdaq 100) actually closed
3.91% lower on the day. The point is that the Nasdaq got whacked! The picture
was slightly, but not much, better in the other major indices. The S&P 500
Index closed 1.77% lower and the Dow Jones lost 1.63% yesterday. Volume was only
2% higher in the NYSE, but was more than 11% higher in the Nasdaq. This made
yesterday a clear distribution day for all the major indices, especially the
Nasdaq.

If you paid close attention to yesterday morning’s newsletter,
you would have expected the sharp selloff that occurred in teh Nasdaq once it
broke below its key support level around 1686. As you may recall, that support
level was formed from the prior highs of mid-June (prior resistance becomes new
support). This 1686 area previously marked the support that caused several
bounces in the Nasdaq during the prior month, but the support level was violated
yesterday. Once the Nasdaq broke below that level in the afternoon, it should
not have been surprising to see such a sharp selloff. Many traders and investors
had their sell stop orders just below the 1686 level, which added to the selling
momentum once that level was broken. The daily chart of the Nasdaq Composite
below illustrates the prior support level at the 1686 area and yesterday’s break
of support:

Notice the length of yesterday’s candlestick bar on the chart
above. This range expansion is a common occurrence that you typically see when
an index breaks a major level of support or resistance. It also goes without
saying that the prior support level around 1686 will now act as the new
resistance since that level has been broken. In fact, any meager rally attempt
up to the 1686 level would probably represent a low-risk short sale entry in QQQ
(Nasdaq 100 Index).

As you may have noticed on the prior chart, the
Nasdaq Composite closed just above support of its 50-day moving average.
However, odds are good that the 50-day moving average will not act as very solid
support because most of the other major indices and market sectors have broken
their respective 50-day MAs. While the list of sectors and indices trading above
their 50-day moving averages was once extensive, it now appears that a VAST
majority are below their 50-day MAs due to yesterday’s selloff. Below is a quick
reference list I have compiled that shows you which of the major indices and
sectors (represented by ETFs) are still above versus those that are now below
their 50-day MAs (in no particular order):

Broad-based ETFs below the
50-day MA:
SPY, DIA, QQQ, IWM, MDY

Broad-based ETFs above the
50-day MA:
none! (although the Nasdaq Composite (COMPX) is still above it)

Major sector ETFs below the 50-day MA: PPH, RTH, OIH, XLF, BBH,
TTH, SWH, HHH, XLY, WMH, BDH, UTH, IGN

Major sector ETFs above the
50-day MA:
SMH, XLB, XLI, ICF, IYR

As you can see, there are no
broad-based ETFs and only a few sector ETFs still trading above their 50-day
moving averages. Interestingly, the ETFs that are now trading below their 50-day
moving averages only broke below that level with yesterday’s selloff. This is
significant because the 50-day moving average is an indicator that is closely
watched by institutions. Breaks above or below a 50-day moving average are often
the source of institutional orders, so it is important to always keep a close
eye on this moving average level. Therefore, we will be watching to see how many
of these sectors make an attempt at recovering back above their 50-day MAs
versus those that simply follow-through with more losses due to yesterday’s
selling momentum.

The good news about yesterday’s selloff is that the
major indices have finally started to break out of the nine-week consolidation
zone that has been putting all the traders to sleep. While a break to the
downside may not be what the bulls were hoping for, the direction does not
matter much to us because short-term traders just like to have a trend in either
direction. The worst type of trading condition is not a downtrend, but a
sideways trading range with no volatility. Yesterday’s action was quite negative
because it was so broad-based and many key support levels were broken. As such,
we have shifted our overall short-term bias from neutral to bearish. This does
not mean that we will not enter any long positions, but it means that we are
changing our overall view from “buying the pullbacks to support” to “sell short
the rallies into resistance.” In other words, the risk/reward now seems to favor
shorting the rallies (selling into strength) rather than buying the pullbacks
(buying on weakness). The weekly charts still look bullish, so we are not going
to be too aggressive on the short side, but it seems that the market will now
make another leg down before heading higher from here. However, given the
severity of yesterday’s selloff, the broad market could easily bounce today as a
correction.


Today’s watch list:


RTH – Retail HOLDR
Short

Trigger = below 81.29 (below
yesterday’s low)
Target = 79.85 (low of July 1; prior low)
Stop = 82.05
(above the 50-day MA)

Notes = The Retail index is starting to crack and
RTH just broke below the 50-day MA yesterday. We are looking for more
follow-through, but will only short on a break below yesterday’s low. Always use
limit orders with RTH due to its wide spread and also follow $IRH.X to track the
fair value of RTH.


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
Model
.

Closed Positions:

    SMH long (from Aug. 4) –
    bought 32.83, sold 32.58, points = (0.25),
    net P/L = ($84)

Open Positions:

    EWJ long (full position from July 15 – 17) –
    bought 7.81 (avg.), new
    stop at 7.34, target of 8.80, unrealized points = (0.43), unrealized P/L =
    ($344)

Notes:

We closed out SMH for a loss prior
to hitting its original stop yesterday due to relative weakness in the
Semiconductor Index. We are still long EWJ, but it closed very close to its
stop. If it hits the stop, we will honor it. However, if it hits the stop due to
a gap down, we will use the MTG Opening
Gap Rules
, which basically state that we will mark the 5 minute lows before
taking the stop to ensure it will not recover immediately after the open. In
either case, we will immediately send an e-mail to you if/when we take the EWJ
stop. Remember we can always re-enter EWJ if we get stopped out, but better to
honor the stop.

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
change.

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
updates.

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.

Unless
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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