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The Wagner Daily


Commentary:

The major indices started the day with a continuation of the selloff that began with the highs of August 22. However, the selling pressure only lasted about thirty minutes before a few buyers stepped in and caused the broad market to trade sideways in a very tight range for several hours throughout the mid-day doldrums. Although a sideways consolidation at the low of the day will often lead to new lows, the market began to rally as it entered the 2:30 pm EST “reversal period.” The rally sustained itself into the close and caused each of the major indices to close near their intraday highs. More importantly, the Dow, S&P, and Nasdaq each closed above resistance of their previous day’s highs. Looking at daily charts of both SPY (S&P 500 Index) and DIA (Dow Jones Industrials), notice how both indices found support at their 20-day moving averages yesterday, which aided the rally. The daily charts below illustrate this:

Notice how both indices probed below their 20-day moving averages on an intraday basis, but recovered to close above them. This type of price action is bullish because it indicates that buyers jumped in and bought the test of moving average support, especially since the 20-day moving average is an interval that is closely followed by short-term traders. We incrementally took profits on our DIA short throughout yesterday morning and covered the remaining shares after the Dow broke above the 3-day downtrend line from the highs of August 22. Looking at a 15-minute chart of DIA below, notice how quickly it rallied after breaking above resistance of the downtrend line. Notice also how 93.50 has become a key pivot point on DIA (the dotted black line). I removed the intraday moving averages so you can more clearly see the trend line:

Although it would not have been easy to spot on a daily chart, the break above the three-day downtrend line was very clear if you were looking at a shorter-term intraday chart. In fact, SPY and QQQ also rallied similarly after breaking their three-day downtrend lines. Always be on the lookout for trend lines on ALL time frames! That is why it is important to simultaneously monitor several time intervals on your charts. For example, we primarily follow the 15-minute, 60-minute (hourly), daily, and weekly charts for the S&P (SPY), Nasdaq (QQQ), and the Dow (DIA). Obviously, the most ideal trade with the best risk/reward is when each of your chart’s time intervals confirm each other.

You may have noticed that the total market volume increased a bit yesterday, though it still came in below its 50-day moving average. Volume in the NYSE increased nearly 25% over the previous day, and the Nasdaq volume increased over 22%. More importantly, advancing volume firmly led declining volume in both markets. If you compare a chart of advancing volume to declining volume, you will notice how the advancing volume shot higher in the late afternoon, while declining volume stayed flat. This bullish action confirmed the afternoon rally that caused the major indices to close above their opening prices.

Based on yesterday afternoon’s price action, we expect a slightly bullish overtone in the broad market for today’s trading session. However, the major indices will have to contend with Fibonacci resistance that was created from the selloff that began on August 22. If you draw retracement lines from the August 22 high down to yesterday morning’s low, you will notice that each of the major indices ran out of gas between their 38.2% and 50% Fibonacci retracement levels. Interestingly, the high of QQQ yesterday corresponded exactly with its 50% Fibonacci retracement. I have annotated this for you on the 15-minute chart of QQQ below:

If you check your charts, you will see that SPY and DIA also stopped just shy of their 50% retracement levels as well. Therefore, in order to buy the major indices today, we would want to see a clear break above their respective 61.8% retracement levels. Otherwise, the broad market is just as likely to turn around from here and head back down. However, when an index or stock retraces more than 61.8% of a selloff, it often reverses completely and rallies back up to test its prior highs because the shorts become trapped and new buyers are subsequently attracted. As a rule of thumb, we typically cover shorts when an index retraces and rallies more than 61.8% of a prior selloff. Conversely, it is a good idea to use the 61.8% guideline to sell any long positions that retrace (pull back) more than 61.8% of a prior rally.

There is no significant economic data scheduled to be released today, but Jobless Claims and GDP will both be reported before the open tomorrow. With a lack of major corporate earnings reports this week, tomorrow’s economic data could easily move the markets, especially since volume has been light overall. Per yesterday’s newsletter, remember that light volume makes it easier to move the market around in both directions.

Finally, keep an eye on the Semiconductor (SOX) Index today. The SOX clearly broke out on both its daily and weekly charts last week and it is likely to resume its uptrend a while longer. Since the Semis are such a heavily-weighted component of the entire market, watch the SOX index for clues regarding broad market direction, especially the Nasdaq. SMH (Semiconductor HOLDR) is one of the only sector ETFs that looks quite bullish on all its charts. ADX and CCI indicators are both showing buy signals as well, so SMH, as well as QQQ, may be worth a look for possible swing trades on the long side.


Today’s watch list:


UTH – Utilities HOLDR
Long

Trigger = above 70.75 (above the daily consolidation)
Target = 72.95 (resistance of the 61.8% Fibo retracement)

Stop = 69.70 (below yesterday’s low)

Notes = Although it may not break out today, we like the way UTH has been forming a base of consolidation just above its 20-day moving average. If it does finally break out, we expect it to easily run a few points due to the base of support that has been built. Also, if you look at the WEEKLY chart of UTH, you will see that it is poised to break resistance of a multi-year downtrend, meaning we may want to be patient with this play and attempt to trail the profits longer.

Be aware that UTH often has a wide spread and you definitely want to use limit orders when trading it. More importantly, remember you can use its index to more accurately know where to place your limit order based on the fair value of its underlying components. The index for UTH is $XUH.X, which can be charted just like UTH. Because of the wide spreads, we use alarms to alert us of an entry price, rather than a mechanical buy stop order. Also keep in mind that we account for the volatility of UTH by reducing our share size, since it has a multiplier ratio of only 0.5, based on the MTG Position Sizing Model.


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:

    DIA short (from Aug. 25) –
    shorted 93.43, covered 92.88 (avg.), points = + 0.55, net P/L =
    + $104

Open Positions:

    PPH long (from Aug. 26) –
    bought 73.27, stop at 72.60, target of 75.05, unrealized points = + 0.08, unrealized P/L =
    + $8

Notes:

We incrementally took profits on the DIA short yesterday through the use of trailing stops and covered the remaining shares near the bottom, right before the market reversed in the afternoon (per several intraday e-mail alerts). We also bought PPH when it triggered yesterday and we are long going into today. As always, we will trail the stop higher in PPH as we are able.

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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