It looks like Monday’s low-volume breakout that we discussed in Tuesday’s Wagner Daily proved to be an accurate warning signal that the rally may be running out of momentum (at least in the short term). Each of the major indices sustained losses of approximately 0.8% yesterday, led by weakness in the Nasdaq. The only two sectors that closed in the green (barely) were Pharmaceuticals (PPH) and Biotechs (BBH). Weakness was broad-based, but Retail (RTH) was once again the weakest sector ETF and closed 3% lower. This worked out great for us, as we are still short half position of RTH and are now sitting on an unrealized gain of nearly four points.
As you probably know, we were cautious about being long the broad market for several reasons going into yesterday, the most important being the lack of volume confirmation on Monday’s rally. This proved to be a significant factor in yesterday’s selloff because there were not enough buyers to hold up the market when the sellers came. More importantly, yesterday’s volume was 5% higher in the NYSE and 10% higher in the Nasdaq. This means that yesterday was a technical “distribution day” since each of the major indices closed lower, but on higher volume than the previous day. This marks the second distribution day in the Nasdaq during the past three sessions, which tells us that institutions have been selling into the recent strength. Again, if volume increases but prices fail to move higher, this “churning” effect is bearish and eventually leads to lower prices. Novice investors never see it coming and sell when it is too late. But if you pay close attention to volume patterns on a daily basis, you will often see the selloffs coming before the crowd figures it out.
Looking at the daily charts, each of the major indices are still within a trading range of the past week, but are now poised to break support and make another leg lower. SPY (S&P 500 Index), DIA (Dow Jones Industrial Avg.), and QQQ (Nasdaq 100 Index) each closed at the lower end of the recent trading range, and on increasing volume. When combined with the fact that Monday’s breakout to new 52-week highs failed, this leads me to believe that we will see lower prices over the next several days. A test of the 20-day moving average of each of the major indices would not be surprising. It is certainly too early to imply that the greater context of the uptrend is in any danger at all because the weekly charts, which are more important, remain solidly intact. What I do believe, however, is that we may have a few trading opportunities on the short side if the broad market breaks below last week’s consolidation range. Here are the key numbers to watch for a break of support:
SPY – 102.40 (low of September 5)
DIA – 94.86 (low of September 5)
QQQ – 33.67 (low of September 5)
Because the market is still in the range of last week’s rally, be careful shorting too early. The safest bet to look for shorts is waiting for a break of yesterday’s low before entering any new shorts. That would likely trigger downside momentum that is necessary in order to accelerate the selling. Otherwise, the market could continue to chop around in a range for a while longer. On the long side, there may be a few areas of strength such as the Biotechs and Pharmaceuticals, but the broad market feels heavy and risk/reward probably does not justify any new long positions here.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Index)
Trigger = below 94.80 (below September 5 low)
Target = 92.80 (support of the 50-day MA)
Stop = 95.60 (above yesterday’s close)
Notes = The Dow has been showing the most relative weakness of the major indices, so we are looking to short a break of support. Remember to use the MTG Opening Gap Rules in the event of a large opening gap down. This means we would wait for a break of the 20-minute lows ONLY IF it gaps down and opens below the trigger price.
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
RTH short (1/2 position from Sept. 4) –
shorted 90.76, new stop 87.10, target (already surpassed), unrealized points = + 3.87, unrealized P/L = + $193
We remain short RTH, which has surpassed its profit target of 88.20 by more than a point. We continue trailing a stop lower until it gets hit, although we will probably cover on the open today, especially if it gaps down. New stop at 87.10 for now.
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)
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