The Wagner Daily


After two consecutive bearish distribution days in the NYSE, the major indices bounced a bit yesterday, but on lighter volume. The Dow Jones Average and the S&P 500 Index both closed approximately 0.5% higher, while the Nasdaq Composite gained 1.2%. However, volume in the NYSE was 15% lighter than the previous day and was 12% lower in the Nasdaq. The lighter volume indicates a continuation of the pattern we have been seeing for the past week — lighter volume on the up days and heavier volume on the down days. While there was enough institutional support to hold up the broad market yesterday, the recent volume patterns suggest heavier institutional selling on the down days than buying on the up days. As you know, we have been analyzing the market’s volume pattern carefully during the past week and the bearish pattern did not change yesterday, despite the gains.

The major indices bounced off of key support levels that we discussed in yesterday’s newsletter. For example, yesterday’s low in SPY (S&P 500 Index) was 101.84. This coincides with the horizontal price support that we discussed just below the 102 level and indicates that SPY continued to find support at that area (click here to review the SPY chart from yesterday’s newsletter). However, it is important to note that yesterday’s high in SPY was 102.76, which represents a perfect double top with the previous day’s high. SPY (and the entire broad market) also sold off during the final hour of trading, causing it to close in the middle of its range and forming an “inside day.”

DIA (Dow Jones Industrial Average) perfectly bounced off support of its 20-day moving average yesterday. The 20-day MA of DIA is at 94.54 and yesterday’s low in DIA was 94.53! Pretty fascinating how the key moving averages often provide support and resistance at the exact prices. Although DIA briefly probed above the previous day’s high, the rally was short-lived and the selloff into the final hour of trading caused DIA to close in the middle of its range, just like SPY. The daily chart of DIA below illustrates how it perfectly bounced off its 20-day moving average:

QQQ (Nasdaq 100 Index) was the only one of the three major indices that traded below its previous day’s low on an intraday basis. However, just like DIA, it found support just above its 20-day moving average and retraced the morning losses before closing in the upper third of its intraday range. QQQ actually began the day showing relative weakness to the S&P, but was showing relative strength by the end of the day, due in part to strength in the Biotechnology Sector.

Was yesterday’s bounce a point to buy or a chance to unload long positions and sell short? We obviously cannot know for certain, but two factors point to the odds of lower prices in the short term. The first factor is, of course, the bearish volume patterns we have been discussing over the past week. Yesterday’s light volume rally was a continuation of that pattern. Second is the fact that the major indices were unable to close above the previous day’s highs. Each of the major indices closed below their respective highs of the previous day. If the bounce was significant, the highs would have been taken out. It is also interesting that the broad market sold off during the final hour, which is the exact opposite of last week’s pattern of buying during the final hour.

When analyzing the strength of a bounce, one of the best tools you can use is Fibonacci Retracement levels. If you are not familiar with Fibonacci, click here to read a short article I wrote about it. Generally speaking, a trend is likely to resume in its primary direction if each retracement is less than 61.8%. The weaker the index, the less of a retracement there will be. A 38.2% retracement is considered a weak bounce, while a bounce ABOVE the 61.8% level is usually strong enough to reverse the downtrend. Therefore, we often use Fibonacci retracement levels as a tool to assist in stop placement. As a clear example of this, take a look at a 15-minute chart of DIA, which we have been short for a few days:

As you can see, I have labeled the major Fibonacci resistance levels on the chart above. Notice how DIA initially found resistance at the first retracement level of 38.2%, but eventually retraced just beyond its 50% Fibo level. However, it failed to break above the 61.8% retracement. This indicates the short-term trend is likely to resume in its previous direction, which is down, UNLESS the index retraces back above the 61.8% level. As such, our stop on the DIA short is set exactly at the 61.8% retracement level, right around 95.50. When in doubt, the 61.8% retracement level is often a safe price to place your stops (both in uptrends and downtrends). If an index retraces beyond that level in the direction opposite your trade, you generally don’t want to be in the trade any more.

There are several important economic reports due out before the bell today. Here are the reports and the estimate consensuses:

08:30 PPI 0.3%

08:30 Core PPI 0.1%

08:30 Retail Sales 1.5%

08:30 Retail Sales ex-auto 0.8%

09:45 Mich Sentiment-Prel. 90.4

Obviously, the combination of these reports is likely to move the market. Oracle (ORCL) also reported earnings before the bell today and, while they met profit expectations, their revenues came in below estimates. As a result, the Nasdaq futures immediately dropped 8 points in the pre-market. This gives us a negative tone going in to the open, but, as I mentioned yesterday, I would not be aggressively short UNLESS the major indices break the lows of September 10. Watch those lows and don’t be afraid to get short if they are broken. As long as you have stops, you are predefining your maximum risk on each trade. Finally, if volume surges and yesterday’s highs are broken, use caution on the short side because there is still a lot of support at current prices and anything can happen! Remember to always TRADE WHAT YOU SEE, NOT WHAT YOU THINK!

Today’s watch list:

(There are no new plays for today. Instead, we will focus on micromanaging our open positions.)

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:

    DIA short (from Sept. 10) –
    shorted 94.80, stop 95.50, target 92.80, unrealized points = (0.12), unrealized P/L = ($24)

    HHH short (from Sept. 11) –
    shorted 41.79, new stop 42.70, target 40.20, unrealized points = (0.20), unrealized P/L = ($40)


We remain short DIA with the same stop as yesterday.

The HHH short triggered yesterday and have adjusted the stop slightly higher to 42.70.

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