The Wagner Daily


The price correction that occurred last Friday was short-lived, as the major indices each quickly recovered yesterday. The Nasdaq Composite and the S&P 500 Index both broke and closed above last week’s highs, causing both indices to once again set new 52-week highs. However, in a pattern that began last Friday, the Dow Jones Industrial Average again showed relative weakness because it was the only one of the three major indices that did not close above last week’s highs. The Dow has now clearly defined an important trading range of 9600 as upper level resistance and 9500 as lower level support. Any significant move out of that range is likely to have a big impact on the broad market, so continue watching the Dow’s divergence closely. It is unlikely that the S&P 500 and Nasdaq will continue to rally much longer if the Dow does not participate in similar rallies.

Although the Nasdaq’s volume was slightly higher, it is important to note that yesterday’s volume in the NYSE was about 10% lower than the previous day — despite the fact that the S&P 500 closed at a new 52-week high. Ideally, there would be more confirmation of yesterday’s breakout if it occurred on higher volume than the previous day, which was actually a down day. This lighter volume advance tells us to be cautious on the long side because yesterday’s rally was more likely attributed to a lack of sellers rather than an abundance of buyers, which a true “accumulation day” would represent. As we mentioned last week, indexes that are trading at new 52-week highs often go much higher due to the lack of overhead resistance. However, each subsequent breakout to a new high should also be confirmed by an increase in volume. If, on the other hand, each breakout to a new high is marked by lower volume than the previous breakout, it is usually a warning sign that the rally may be coming to an end. It’s too early to know for sure, but keep a close eye on the market’s volume each time a new high is set this week. As long as volume stays strong on each subsequent breakout, the rally is likely to continue. But if volume begins drying up, be cautious if you’re long.

With the exception of a few quick intraday trades, we have not been trading the broad market much over the past several days. Nevertheless, we have netted about 3 points of profit from two different sector ETFs. As you know, we have been simultaneously short RTH and long PPH over the past several days and the combination worked well yesterday. The short position in RTH was selected based on its recent relative weakness and we bought PPH because of its relative strength. Since RTH had been a leader over the past several months while PPH was a laggard, we are now seeing a clear example of sector rotation from an overbought sector back into an oversold sector. By paying attention to this sector rotation, you can often profit from both the long and short side, at the same time. This reduces your risk in case the broad market suddenly makes a sharp move in a particular direction. Interestingly, the Retail sector ($RLX.X and RTH) was the weakest sector yesterday and was the only major sector that closed in the red. At the same time, the Pharmaceuticals ($DRG.X and PPH) were one of the strongest sectors and closed nearly 2% higher on the day. Below is an overlay chart of both PPH and RTH that shows the recent price divergence between the two sectors:

On the chart above, notice how PPH (the blue line) has been in an uptrend during the past several days while RTH (the red line) has been in a downtrend. The divergence was relatively minor until yesterday morning, at which point PPH rallied sharply and RTH sold off to new lows. From yesterday’s opening until about 12 noon EST, notice how PPH kept setting new intraday highs while RTH was simultaneously setting new intraday lows. This allowed us to profit from both PPH long and RTH short, which we were positioned in for the past several days.

Although the recent uptrend is firmly intact from a technical basis, we feel caution is in order over the next several days. The fact that new highs were set on lower volume in the NYSE yesterday is a yellow caution flag, not to mention the fact that the S&P has closed higher on 9 out of the last 10 trading days. Finally, the 20-day moving averages are now becoming quite extended away from the prices of the major indices. Nevertheless, none of these factors indicate that the market will definitely correct here. Therefore, it is crucial to wait for price confirmation before attempting any aggressive short sales, especially in the broad market. “The trend is your friend” is a cliche that is a bit worn out, but speaks a fundamental truth that we all need to remember as traders.

Today’s watch list:

(There are no new “official” plays today. However, you may consider BBH (Biotechnology HOLDR) on the long side because it closed at a new 52-week high yesterday after consolidating for several months. SMH (Semiconductor HOLDR) also closed at a new high yesterday.)

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 Sept. 5) –
    bought 74.95, sold 76.26 (avg.), points = + 1.31, net P/L = + $128

    RTH short (1/2 position from Sept. 4) –
    shorted 90.76, covered 89.12, points = + 1.64, net P/L = + $81

    TLT long (from Sept. 8) –
    bought 84.21, sold 83.41, points = (0.80), net P/L = ($166)

Open Positions:

    RTH short (1/2 position from Sept. 4) –
    shorted 90.76, new stop over 5-minute high, target of 88.20, unrealized points = + 1.21, unrealized P/L = + $60


We incrementally sold PPH into strength yesterday and it traded within ten cents of our price target.

We also covered 1/2 position of RTH in the morning to lock in gains, then trailed a stop lower on the second half of the position. RTH actually hit our trailing stop within the final several minutes of trading, but our order never got filled. Therefore, we are still short 1/2 position of RTH from overnight going into today. For the new stop on the remaining shares of RTH, we will mark the high of the first 5 minutes of trading and will set a stop just above that price. Either way, we are still looking at a solid gain in RTH.

We bought TLT yesterday when it traded through our trigger price of 84.20. However, the breakout failed and we were stopped out later in the afternoon. Since the breakout failed, you don’t want to stay in it because failed breakouts can often reverse sharply. It was a good technical setup, but it just didn’t work out.

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