The Wagner Daily


After the release of better than expected U.S. payroll numbers last Friday morning before the open, the major indices began the day with a sharp opening gap up. SPY (S&P 500 Index) and DIA (Dow Jones Industrial Average) both opened 1.2% higher, while ONEQ (Nasdaq Composite Index) gapped 1.7% higher. Although unexpected gaps like this often fail to hold, the gap remained intact through the 10 am EST reversal period, forcing us to cover our short positions. From that point, QQQ (Nasdaq 100 Index) and ONEQ both showed relative strength to SPY and DIA throughout the remainder of the day. While SPY and DIA traded sideways in a tight range, QQQ and ONEQ both grinded higher in a steady uptrend that lasted until the final hour of trading, at which point selling kicked in. The selloff during the final hour actually caused both SPY and DIA to break below support of their morning lows and trade “into the gap.” The Nasdaq also weakened, but continued to show relative strength and held above the prior intraday lows. SPY and DIA each closed 0.9% higher, but the relative strength in the Nasdaq caused ONEQ to close 2.4% higher than the previous day.

The combination of the 61.8% Fibonacci resistance level, several bearish distribution days with light volume up days, and a perfect head and shoulders pattern all combined to give us solid technical reasons to be short SPY and DIA going into Friday morning. Nevertheless, it didn’t matter because the market went higher. Did we feel some pain with the losses from our short positions? Yes. Knowing what we know now, would we have made the same trades all over again? Yes. While hindsight shows we were obviously wrong, the reasons for the trade setup were clear and we would do the same trades all over again if given the chance. All we can do on a daily basis is put the long-term statistical odds in our favor by consistently entering trades that offer a positive risk/reward ratio. This does not mean we will always be right, but we are right more than we are wrong and, when combined with proper position management, that is all it takes to consistently take profits out of the market.

From a technical perspective, one of the most important things about Friday’s gains was that volume increased sharply. NYSE volume increased 21.6% and the Nasdaq volume swelled 25% over the previous day. Four out of the last eight days in the Nasdaq have closed higher, but this was the first one of those four days in which the Nasdaq closed higher than the previous day AND on higher volume. This is bullish, but follows the two bearish distribution days the Nasdaq has seen over the past week. Without a doubt, one factor responsible for the surge in volume was forced short covering by the hedge funds that was caused due to the unexpected gap up, which equally surprised us as well.

Going into today, I have to confess I am a bit unclear of what to expect. The bearish head and shoulders pattern we discussed in the October 3 issue of The Wagner Daily is still intact in both the S&P 500 and the Dow Jones. Unless an index rallies above the head of a head and shoulders, the pattern is still technically intact. However, if an index DOES break above the high of the head (which is the highs of September 18), it becomes known as a “failed head and shoulder pattern,” which is very bullish because it traps all the shorts who anticipated follow-through to the downside with the pattern. None of the major indices broke above their September 18 highs on Friday and, therefore, the possibility of forming double tops at the current levels exists. But, based on the strong increase in Friday’s volume and the relative strength of the Nasdaq, there is no reason to be aggressively short right now either. Furthermore, support of the 20-day moving averages now lies below each of the major indices. So, what is a short-term trader to do? It’s my two cents that you should be patient right now and shift into SOH (sitting on hands) mode until the broad market shows us whether or not it can follow through with Friday’s gains. If so, it will be time to start buying the market again, but let’s wait for confirmation first.

We expect total market volume to be light today due to the Yom Kippur holiday, which is the holiest of Jewish holidays. Intraday trading can often be choppy and erratic on light volume days, so a quick profit taking strategy is required if you are day trading today. For swing trades, this does not matter as much. Beginning tomorrow, some closely-watched companies will be reporting earnings this week. Some of the larger companies are Alcoa (AA), Yahoo! (YHOO), Genentech (DNA), and General Electric (GE).

Today’s watch list:

(Due to the anticipated light volume from the Yom Kippur holiday, there are no new plays for today. We will, however, e-mail you intraday if we find any low-risk swing trade setups. Otherwise, we will re-assess tomorrow morning.)

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 October 2) –
    shorted 94.75, 96.37 (avg.), points = (1.62), net P/L = ($330)

    SPY short (from October 2) –
    shorted 101.88, covered 103.92 (avg.), points = (2.04), net P/L = ($414)

Open Positions:



Friday’s opening gap forced us to use the MTG Opening Gap Rules in order to manage our open positions. We e-mailed intraday updates informing subscribers of this, but, if you were a bit confused, you may click here for a more detailed explanation of what occurred.

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