The Wagner Daily


The major indices closed last week with a complete lack of enthusiasm as
the pattern of divergence between the Dow/S&P and the Nasdaq continued. Like
most of the week, the Nasdaq drifted sideways to lower throughout the day, while
the Dow and S&P drifted sideways to higher. The trading range of the broad
market was rather narrow on Friday and the S&P futures spent most of the day
in a tight range of five points. Most notably, total market volume was extremely
light! Volume in the NYSE came in at 1.08 billion shares, which was 21% lower
than the previous day. Interestingly, Friday’s volume in the NYSE was the
lightest volume day of trading since February 19 (not including the shortened
July 3 session). Volume in the Nasdaq was also very light, the lowest since
April 21. Friday was a typical summer doldrums trading day in which most of the
big money was not participating and was on vacation/holiday instead. The Dow,
which showed the most relative strength of the major indices on Friday, closed
0.71% higher, the S&P closed 0.36% higher, and the Nasdaq once again
diverged and closed 0.49% lower. We expected to see sector rotation begin to
shift into the Nasdaq last Friday, but that did not occur. Therefore, since
Friday was the fourth consecutive day of relative weakness in the Nasdaq, it
becomes even more likely that we will see relative strength in the Nasdaq today
and perhaps a decent bounce.

Of all the moving averages that we follow
when anticipating support and resistance levels in the broad market, the 200-MA
is the most powerful, regardless of the time interval of the chart. Basically,
the longer the time interval of the moving average, the more powerful the
support or resistance level will be. In fact, it is very rare that an index or
stock will break through a 200-period moving average without first bouncing off
of it, often several times. A clear example of that could be seen on Friday when
the S&P repeatedly ran into overhead resistance of its 200-period moving
average on the 15 minute time interval. The chart of SPY (S&P 500 Index)
below illustrates this. The blue line is the 200-period moving average:

As you can see, the 200-MA prevented SPY from breaking out on several
occasions throughout the day last Friday, although it finally popped through
during the final thirty minutes. Also notice how both the 20 and 40-period
moving averages both acted as support on the downside as well. The three primary
moving averages I follow on intraday charts are: 20, 40, and 200-period simple
moving averages.

Last week’s break of support from the prior
consolidation period has caused some divergence in the daily charts. While the
Nasdaq is now firmly below both its 20 and 50-day moving averages, the Dow
actually closed the week above its 20 and 50-day MAs. Like the Nasdaq, the
S&P is also trading below its 20 and 50-day moving averages, but is looking
more bearish because the S&P is the only one of three major indices in which
the 20-day moving average has crossed down below the 50-day. The daily chart of
SPY below illustrates this:

This is the first time the 20-day MA crossed below the 50-day MA since
March 31, 2003. In a healthy uptrend, you normally want to see the 20-day MA
remain above the 50-day MA because the opposite usually means that a trend is
about to reverse. However, remember that the weekly charts still look bullish
and show no signs of trouble.

As I mentioned several times last week, we
are entering the worst of the typical “summer doldrums” during which volume
dries up and a complete lack of conviction on both sides of the market prevails.
This is certainly not the time to be aggressive either buying or shorting the
market because of the frequency of false breakdowns and breakouts that normally
go along with this time of year. Smart traders do what the “big money” on Wall
Street does. . .nothing! While profitable trades are out there (such as last
week’s overnight trade in XLE), you have to search much harder to find them.
Being extremely selective in your trade pick is crucial right now or else you
will get too chopped up. Make capital preservation your number one priority
right now and the profits will come later — but only if you preserve capital
will you be able to reap the benefits when conditions improve.

Today’s watch list:

We did not come
across any clear setups in our research over the weekend, so there are no new
“official” trade setups for today. You may want to keep an eye on OIH, which
consolidated its gains on Friday. It acts like it wants to run another day, so
it is a possible buy above Friday’s high. However, remember that we will be very
selective with our trade picks over the next month to reduce the odds of getting
chopped up from trade setups that do not follow through.

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:

    XLE long (full position from Aug. 7) –
    bought 23.37, sold 23.90, points
    = + 0.53, net P/L = + $300

    BBH long (full position from Aug. 8) –

    bought 127.61, sold 126.67, points = (0.94), net P/L = ($97)

Open Positions:

    EWJ long (full position from July 15 – 17) –
    bought 7.81 (avg.), stop at
    7.34, target of 8.80, unrealized points = (0.34), unrealized P/L = ($272)


We sold XLE into the opening gap because it
opened near our initial price target. We also bought BBH when it triggered, but
the breakout failed and we were stopped out. We remain long EWJ, which is our
only open position.

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