The Wagner Daily


I’m excited to resume publication of The Wagner Daily today after taking my first week of vacation since daily publication of the newsletter began thirteen months ago. Taking a week away from the markets was refreshing and, after spending most of yesterday doing research and technical scanning, I’m ready to start buying and selling again! Commenting extensively on last week’s trading action would obviously be fruitless because I was not actually trading the markets real-time. So, I will focus instead on what the various charts of the indices are telling me as we enter a new week.

The S&P 500 (and SPY) broke out of a short-term downtrend on the daily charts in the beginning of last week, then grinded its way higher throughout the remainder of the week until it got whacked pretty hard on Friday. Interestingly, this caused the S&P futures to close the week within two points of where it closed the previous week. The S&P futures closed at 990.50 on August 15, the last day I actively traded, and closed at 992.50 last Friday, August 22. The daily chart of SPY (S&P 500 Index) below illustrates how the index broke out of a short-term downtrend (annotated with a blue line) at the beginning of last week, but gave back all the gains with Friday’s selloff.

Interestingly, notice that the prior downtrend line is now converging in the area of both the 20 and 50-day moving averages (circled in purple). As such, expect this area to provide price support for the S&P and SPY. But, looking at the chart above, there are two additional observations that are very important. First, notice how SPY once again found resistance around 102 (which corresponds to the 1013 area in the S&P futures). Looking at the orange horizontal dotted line, you will see that last Friday’s failure to break the 102 area means that the S&P has now formed a triple top on the daily chart. Clearly, this area is acting as strong resistance and is now the proverbial “line in the sand.” If the S&P 500 subsequently breaks that triple top, it is a “no-brainer” to buy SPY and also cover any short positions. Otherwise, I would be very cautious on the long side.

The second observation from the daily chart of SPY is that last Friday’s opening gap-up and subsequent selloff formed a candlestick pattern known as “bearish engulfing.” This occurs when an index or stock opens above the previous day’s high, but sells off and closes below the previous day’s low. In other words, the candlestick “engulfs” the previous day’s trading range. You can learn more about this and other candlestick patterns for free by going to the “chart school” section of the web site. Morpheus Trading Group has no affiliation with the web site; we simply like their site for its free educational content.

A “bearish engulfing” candlestick is usually quite bearish because it traps both the bulls who bought the opening gap up and those who bought the previous day as well. The result is typically continuation of momentum to the downside over the next several days. However, since Friday’s selloff was pretty sharp, there is a good possibility that the S&P trades sideways today and corrects by time before heading lower over the next few days. In addition, there is a lot of price support in this range and the longer-term weekly chart remains intact. Friday’s volume in the NYSE was also lighter than the previous day, which does NOT confirm the bearish price action. For those of you who use the ADX indicator on your daily charts, you will notice that it has not been higher than 20 since the beginning of July. This tells us that we remain in a big trading range and last week’s short-lived rally did not constitute a trend. The bottom line is this. . .The triple top and bearish engulfing candlestick could set an extended selloff in motion, but we simply need more confirmation before we become ultra-bearish.

The Nasdaq showed relative strength last week and, unlike the S&P 500 Index, briefly traded at a new 52-week high on Friday. However, the breakout failed and the Nasdaq also reversed Friday’s early gains and subsequently closed lower than the previous day. Although the Nasdaq futures sold off on Friday, the index managed to hold above the previous day’s low, meaning that a “bearish engulfing” candlestick was NOT formed. Nevertheless, when an index gaps up to open at a new 52-week high, but fails to hold above it, it often marks a top. So, we want to keep a close eye on the Nasdaq to see if it makes another attempt at the new highs. The daily chart of QQQ (Nasdaq 100 Index) below illustrates the failed breakout:

Looking above, notice how the 20-day moving average of QQQ is still above the 50-day moving average and has never crossed below the 50-day MA. This is in contrast to the daily chart of SPY, which is showing a bearish moving average crossover that occurred on August 7 (the 20-day MA crossed below the 50-day MA).

Like the Nasdaq, the Dow Jones Industrial Average also showed relative strength to the S&P last week and briefly traded at a new 52-week high on Friday. But, the breakout in the Dow also failed and the index closed below the previous day’s low. Here is a daily chart of DIA (Dow Jones Avg.):

The most obvious divergence of last week was in the Semiconductor (SOX) Index. Although the index gave back much of its intraday gain on Friday, the SOX still closed at a new 52-week high. In fact, the Semiconductor Index set and closed at a new 52-week high in four out of the last five days. The index has been on fire, led by Intel, which broke out of a solid weekly base of support last week. If you had to be long something right now, SMH (Semiconductor HOLDR) is clearly showing the most relative strength of any sector or broad-based ETF. However, given the broad market’s bearish action on Friday, you are probably going to be “late to the party” if you buy now. The Retail sector (RTH) also has been showing a lot of strength, while the Pharmaceuticals (PPH) continue getting whacked. The Financial Sector (XLF) broke below support of both the 20 and 50-day moving averages on Friday and appears poised for further downside. Keep an eye out for possible sector rotation back into the the Pharmaceuticals soon.

Our old friend EWJ (Japan Fund) took off like a shot out of a cannon last week and set new highs, only a few days after we finally closed the position. Regardless, we played it correctly by scaling out incrementally into the last bounce because we did not yet have confirmation that the prior highs were going to be broken. But, if you wanted to participate in further upside in EWJ, you could have simply re-entered the position when it broke and held above its prior high of 7.84. This would have allowed you to re-enter only a few cents higher than where we sold. Unfortunately, the breakout in EWJ coincided with my vacation/holiday, so I was not around to buy. But it’s not a big deal; we will just wait for the next low-risk entry point because we remain bullish on Japan over the next year.

Today’s watch list:

DIA – DIAMONDS (Dow Jones Industrial Avg. Tracking Stock)

Trigger = below 93.42
(below horizontal price support and last week’s lows at 93.50 area)
Target = 92.00 (support of the 50-day MA)

Stop = 94.10 (above prior breakout level)

Notes = The Dow showed relative strength last week, but Friday’s selloff erased the entire week of gains in a single day. There is a base of support just above 93.50 (note the horizontal line), but the Dow could sell off sharply if it breaks below that level, trapping the bulls. If that happens, we would expect a re-test of the 50-day MA. In the event of an opening gap down below the trigger price, remember to use the MTG Opening Gap Rules, which basically means we would wait for a break of the twenty minute lows before shorting. New subscribers should review the gap rules by clicking here.

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:



There were no open positions from trades listed in The Wagner Daily, although there are a few open short positions we took over the weekend from calls made in the ETF Real-Time Room last Friday. As always, the results of those trades will be reported in the next Wagner Weekly.

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