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The Wagner Daily


Commentary:

For the first time in several weeks, the major indices trended steadily from the time the market opened straight through until the closing bell. As we have been discussing, the choppy, erratic intraday trading of the past two weeks has been causing each of the major indices to grind to new 52-week highs nearly every day. However, the broad market trended steadily lower on Friday and wiped out the entire week of gains. Both SPY (S&P 500 Index) and ONEQ (Nasdaq Composite Index) closed the week with fractional losses, while DIA (Dow Jones Indu. Avg.) closed the week flat. Volume began the day sharply higher and it initially appeared as if we would see a bearish “distibution day.” However, the volume surge subsided and the total volume in both the NYSE and Nasdaq closed the day slightly lower than the previous day. Nevertheless, declining volume sharply outpaced advancing volume and this was responsible for the eradication of an entire week of gains.

As short-term traders, we really did not care which direction the market trended on Friday; we were simply thrilled that it maintained the direction of its intraday trend for more than an hour or two. More importantly, each intraday retracement was minor, below even the 38.2% Fibonacci level. Unlike the sharp intraday retracements we have become accustomed to, this enabled us to sell short in the morning and use trailing stops to maximize profits throughout the entire day. The Nasdaq showed more relative weakness than both the S&P and Dow on Friday, so we shorted QQQ (Nasdaq 100 Index), BBH (Biotech HOLDR), and SMH (Semiconductor HOLDR) in the ETF Real-Time Room and profited from each of the three trades. Due to the negative reaction from EBAY’s earnings report, the Internet HOLDR (HHH) was also quite weak on Friday. However, most of the losses came in the form of an opening gap down and, as such, did not provide us with a low-risk entry point to sell short intraday. The Home Builder Index ($DJUSHB) also resumed its losses on Friday, despite positive economic data that was released on new home construction starts and permits. The negative reaction to a positive report tells us that the Home Builder Index may be nearing a short-term top. Although there is not an ETF for that index, you could construct your own ETF by trading small share size of a basket of home builder stocks (RYL, TOL, LEN, PHM, KBH, CTX, DHI, etc.).

Obviously, we cannot draw any accurate conclusions about the market’s short-term direction based simply on one down day like Friday. However, it would only take several more days like Friday to wipe out an entire month of gains and set the major indices on a path towards a correction of 10% or more. Let’s take a quick look at the daily charts of each of the major indices in order to give you an overview of some primary support and resistance levels to watch in the coming week. We’ll begin by looking at SPY (S&P 500 Index):

As you can see by the horizontal line, the prior high of September 8 (circled in orange) acted as support on Friday, just under $104. This level also converges with support from the lows of October 9 and 10 (also in orange). Therefore, Friday’s low should be the first support level. If that level is broken, expect the 20-day moving average to provide support around 103.07. Notice also how the 20-day MA converges with the gap up from October 3, the day in which SPY gapped back above its 20-day MA. As for resistance, all of Friday’s range will act as the immediate short-term resistance. You can use the Fibonacci retracement levels to predict resistance near 38.2% and 50% of Friday’s range. Now take a look at DIA (Dow Jones Indu. Avg.):

DIA has horizontal price support at $97, just below Friday’s low. The prior resistance from the highs of September 18 and 19 (circled in orange) should act as the new support level for DIA. If it doesn’t hold, the next support is at the 20-day MA, just below 96. Like SPY, expect DIA to have resistance up through all the Fibonacci retracement levels of last Friday’s range. Also be aware that many Dow components are reporting earnings this week, so the DIA could trade independently of both the S&P 500 and Nasdaq Composite. Finally, let’s take a look at QQQ (Nasdaq 100 Index):

Just like SPY, QQQ has support from its prior high of September 8, which is 34.53. Notice how QQQ closed right above that support level on Friday. Notice how the highs of September 23 and 24 are also at the 34.50 area, which should provide more horizontal price support as well. Below the 34.50 area, look for the 20-day moving average at the 34.11 area.

Because Friday’s selloff occurred without any significant price correction, we would not be surprised to see a small bounce today. However, if the major indices trade sideways or lower today, it will begin making the bulls nervous and you would need to be prepared for potentially sharp losses in the coming week. Watch the relationship between volume and price today to determine whether the sellers are washed out or beginning to increase. If you are still long any stocks or ETFs, we recommend tight stops to protect profits and minimize losses if Friday’s lows are broken. We will re-assess the situation tomorrow.


Today’s watch list:


PPH – Pharmaceutical HOLDR
Long

Trigger = above the high of first 30 minutes
Target = 76.90 (below high of October 3)
Stop = 73.60 (below Friday’s low)

Notes = We have been stalking PPH for an entry during the past several days and we are once again watching it today. Rather than setting a fixed buy trigger, we will look to buy PPH only if and when it trades above its high of the first 30 minutes. If it has enough momentum to break above its high of the first 30-minutes, it will probably resume in the direction of an uptrend today. However, if it never breaks its first 30-minute high, we will pass it by and wait for more confirmation of a reversal.

Notice that PPH formed a “higher low” at $74, after its last major bounce ended in mid-September. Then, after a minor bounce in the beginning of October, PPH came back down a few days ago and has been forming a base of support and double bottom at the $74 support level. PPH showed relative strength to the broad market last Friday as well. Relative to the broad market, the sector has been quite weak during the past five months. However, due to sector rotation, we feel that institutional money flow will begin rotating out of some of the overheated tech stocks and back into the “safer” pharmaceutical stocks. As PPH encounters its 20 and 50-day moving averages, we will watch it carefully and will tighten the stop if necessary. Remember that you can follow the price and fair value of PPH by watching its index, which is $IPH.X. Make sure to use limit orders when trading PPH.


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
Model
.

Closed Positions:

    (none)

Open Positions:

    (none)

Notes:

The PPH long setup did not trigger on Friday, so there were not any new swing trades that were entered. The three profitable intraday trades in the ETF Real-Time Room will be reported in the next Wagner Weekly report.

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
change.

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
updates.

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.

Unless
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

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