The Wagner Daily


Despite Monday’s recovery, the broad market was unable to follow-through to the upside yesterday and each of the major indices once again closed with significant losses. QQQ (Nasdaq 100 Index) lost 2.1%, while both SPY (S&P 500 Index) and DIA (Dow Jones Industrial Average) each lost 1.1%. The broad market opened with a small opening gap down, but sold off sharply at 10 am EST when a lower-than-expected Consumer Confidence report was released. The morning selloff caused each of the major indices to break down to new lows since the major selloff began last Wednesday, September 24. Because key support of the three-day low was broken, the selloff was sharp and happened quickly. However, buyers stepped in after the first hour of trading and caused the broad market to slowly grind back to the morning highs. But, as the major indices approached the morning highs going into the 2:30 pm reversal period, the sellers once again took control, once again causing broad market weakness into the close. Because of this type of intraday price action, it was possible to profit on both the long and short side of the market yesterday, but the bias and overall feel of the market was definitely to the downside. We profited from shorts in HHH (Internet HOLDR) and DIA, but also bought a small position of BBH (Biotech HOLDR), which was showing relative strength after forming a hammer the day before. We are currently long just a half position of BBH and short a quarter position of HHH.

Yesterday’s total market volume was 14% higher than the previous day in the NYSE and 11% higher in the Nasdaq. Since the market closed lower, but on higher volume, this means that yesterday was once again a bearish “distribution day.” Four out of the last five days have closed lower, and two of these days have closed lower on higher volume. When the market bounced this past Monday, it was on lighter volume than any of the selloff days that we have seen since last Wednesday. In a healthy bull market, you need to see higher volume on the up days and lighter volume on the down days. This type of volume patterns is exactly the opposite of what we were seeing when the rally was in full force just one month ago. It goes without saying that the sentiment of the market has completely reversed since that time, but the bearish volume patterns began giving us early warning signs two weeks ago and enabled us to prepare for the coming selloff and bearish reversal. Yesterday marked the first lower monthly closing price in the S&P 500 since March, but long-time subscribers of this newsletter should not have been surprised by the weakness of the past five trading sessions. Volume never lies and is one of the most reliable leading indicators at your disposal.

The Nasdaq Composite (COMPX) is the only one of the three major indices that is still holding above its 50-day moving average, but QQQ, the Nasdaq 100 Index, actually closed below its 50-day MA. Both SPY and DIA now have solid overhead price resistance of their 50-day moving averages, which marked yesterday’s highs in both of these ETFs. However, both SPY and DIA bounced off support of their 20-WEEK moving averages yesterday, which they had not previous tested since late March. Because the support of the primary uptrend line has firmly been broken, and on high volume, we feel the major indices are now in the process of correcting to a 38.2% Fibonacci retracment from the March lows to the September highs. If this occurs, it means that each of the major indices are likely to make another leg down from here before heading much higher. Obviously, there will be bounces along the way, but don’t expect the bounces to act as they did during mid-Summer rally. The sentiment and trend has changed and you will lose capital, lots of it, if you fail to realize and accept this fact. Just as it was difficult to profit from the short side of the market from March through August, you are now likely to face the same challenges profiting from the long side of the market. There will be money to be made on the long side through select sectors that are showing relative strength, but it will just involve a bit more focus and discipline to cut losses when you are wrong. Don’t let one losing trade take you out of the game because you were stubborn. The market does not care about your ego, so remember that your primary goal right now, ESPECIALLY if you don’t sell short, is simply CAPITAL PRESERVATION! As long as you preserve capital in the challenging times, you will always be around to profit from the inevitable good times. But without capital, the game is over. Just a friendly reminder as we enter a different market trend.

Although the current trend of the market is that of “selling into strength” rather than “buying the dips,” we feel that the broad market is likely to bounce or at least trade sideways within the next day or two, especially since a portion of yesterday’s selling was probably due to end-of-quarter activity. While shorts probably are relatively low-risk at this point, you can maximize your profits by attempting to trade sectors with relative strength on the up days and shorting sectors with relative weakness on the down days. If you are looking for an entry point to buy the broad market, consider drawing a trend line from the highs of September 23 down through the highs of September 29 and 30, which works best on an hourly chart. In doing so, you will see a clearly defined downtrend line that has been intact in each of the major indices. The chart of SPY below illustrates this downtrend line:

A similar trendline to that shown above can also be drawn for both DIA and QQQ. If the resistance of this trendline is broken, you may consider testing the waters with some long positions in SPY, QQQ, or DIA, depending on which has the most relative strength. The next resistance is the downtrend line from the highs of September 18. However, be aware that the break out may fail given the heavy sentiment of the market. Also be aware of overhead resistance of the 50-day moving averages. Therefore, we recommend reduced share size on any long positions. As for support, a break below yesterday’s lows will likely cause another wave of selling, but be careful about shorting if yesterday’s lows remain intact. Whatever you do, remember to always obey your stop losses and TRADE WHAT YOU SEE, NOT WHAT YOU THINK!

Today’s watch list:

(There are no new plays for today, but we may enter long positions if the hourly downtrend line is broken. See notes on two open positions below.)

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:

    DIA short (from Sept. 30) –
    shorted 93.09 (avg.), covered 92.72 (avg.), points = + 0.37, net P/L = + $68

    HHH short (1/4 position from Sept. 29) –
    shorted 43.45, covered 42.84, points = + 0.61, net P/L = + $30

Open Positions:

    HHH short (1/4 position from Sept. 29) –
    shorted 43.45, new stop 42.90, target 41.50, unrealized points = + 0.95, unrealized P/L = + $47

    BBH long (1/2 position from Sept. 30) –
    bought 130.25, new stop 128.20, target 133.00, unrealized points = (0.99), unrealized P/L = ($50)


We shorted DIA as a “swing trade” when it triggered per yesterday’s Wagner Daily, but incrementally locked in gains intraday due to tight trailing stops. We also covered 1/4 position of HHH to lock in profits, but remain short 1/4 position of HHH. Note the new stop on HHH above. We bought 1/2 position of BBH when it triggered and have adjusted the stop as per above. We will e-mail any changes to the open positions.

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