The Wagner Daily


Without a doubt, the short-term sentiment of the U.S. equities markets has changed within the past week. While institutions were formerly “buying the dips,” overall sentiment has now shifted into the mode of “selling into strength.” While the actual losses in the broad market only began occurring in the middle of last week, the bearish volume patterns and failed breakouts in the prior weeks gave us early warning that enabled us to be prepared for the selloff. As such, we booked a solid amount of profits last week by positioning ourselves on the short side and using trailing stops to lock in gains as the indices declined. After the S&P 500 Index and the Dow Jones Industrials both broke below technical support of their six-month uptrend lines last Wednesday, the selling intensified and, as we anticipated, both indices quickly dropped down to and closed just below their 50-day moving averages last week. The Nasdaq also exhibited significant losses last week, but the prior relative strength in that index enabled it to hold above its 50-day MA and its primary uptrend line, at least for the time being.

The major indices closed at their lows of the week on Friday, indicating the selling momentum that began on Wednesday remained strong into the weekend. The Small Caps (IWM), which were formerly leading the market’s rally over the past six months, showed the most relative weakness during last week’s selling. The Internet HOLDR (HHH), which also has been a market leader in recent months, was very weak on Friday after a failed breakout to a new 52-week high last week. The inability of the market’s leading sectors and indexes to hold their ground during the selloff tells us that the weakness was broad-based. This was further confirmed by negative volume breadth in which the declining volume sharply outpaced advancing volume for the past three days. September 24, which was the first day of last week’s sharp drop, was a clear distribution day in which volume increased over the previous day, but prices closed lower. The following two days were not technically distribution days because volume declined slightly, but the selling was broad-based and the losses were quite significant. Overall, last week had the feel of several consecutive distribution days.

Because prior support levels always become the new resistance levels once they are broken, the market is now faced with a lot of overhead resistance going into this week. There are still many bulls who did not cut their losses during last week’s selloff, which means that any rally attempt is likely to be met with selling by traders who are trying to minimize their losses in their long positions. However, the broad market is due for a bounce within the next day or two simply as a technical correction. Although the S&P 500 (SPY) and Dow Jones (DIA) are both below their 50-day moving averages, the Nasdaq (QQQ) closed just above support of its 50-day MA. More importantly, SPY and DIA are both still sitting above their 20-week moving averages, which have acted as key support levels since April. The weekly chart of SPY below illustrates how, even though SPY broke its 20 and 50-day moving averages on the daily chart, the more significant 20-week moving average is still intact:

The combination of three consecutive days of sharp selling, support of the Nasdaq’s 50-day MA, and support of the S&P and Dow’s 20-week moving averages is likely to enable the market to bounce today or tomorrow. But, remember that corrections can come in one of two forms: correction by price or correction by time. Both forms of correction enable the intraday moving averages to catch up to the prices of the indexes, but one is more bearish than the other. If the market corrects by price, we would see a bounce in which the market closes higher. A correction by time, on the other hand, would mean that the broad market trades sideways for a few days without bouncing, which would also enable the moving averages to descend to meet the prices. However, a correction by time means there are not even enough buyers to cause the market to bounce and is therefore more bearish than a correction by price.

If the futures gapped down on the open today, I would buy the broad market with a stop below the low of the first 20 minutes of trading. Fading a gap down after several consecutive down days is often a low-risk play that offers a solid risk/reward ratio. However, if the futures gap up (which they are as of the time of this writing), it becomes riskier to buy the market because the gap may fail and you would be long at the top. Also bear in mind that the 1000 level on the S&P futures is likely to act as key psychological resistance now. So, since the market is likely to gap up today, patience is required in order to make sure the gap will hold before entering any new long positions. As for shorts, we feel you can remain short in selective sectors such as Internets (HHH), but staying short the broad market ETFs such as SPY, DIA, or QQQ is riskier. If you’re still short from our call last week, use a tight trailing stop and perhaps look to reshort the next bounce instead.

Today’s watch list:

We planned on listing QQQ and SPY as long setups today, but the opening gap up negatively skews the risk/reward ratio of entering these long for anything more than a day trade. We will, however, e-mail you if we find a low-risk entry point if market internals confirm. For now, we will focus on managing the two 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:

    HHH short (1/2 position from Sept. 26) –
    shorted 42.99, stop 44.15, target 40.25, unrealized points = + 0.34, unrealized P/L = + $34

    RTH short (from Sept. 26) –
    shorted 86.36, new stop 86.80, target 84.10, unrealized points = + 0.11, unrealized P/L = + $11


We shorted RTH when it triggered per Friday’s Wagner Daily and have lowered the stop as per above. We also shorted a HALF position of HHH and notified you via intraday e-mail alert. Both are intended to be multi-day “swing” trades, but we will send an e-mail update if we close these positions or adjust the stops today.

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