The Wagner Daily


After a small opening gap up, the major indices immediately sold off down to the low of the previous day’s range, but the selling pressure subsided after the first hour of trading. The S&P 500 formed a double bottom at the previous day’s low, while the Nasdaq Composite traded slightly below the previous day’s low. The broad market subsequently spent the rest of the day oscillating in a narrow and choppy range within the lower third of Friday’s intraday range. Buyers stepped in during the final thirty minutes of trading and caused the S&P 500 (SPY) and Dow Jones Industrial Average (DIA) to both close approximately 0.5% higher, while the Nasdaq Composite (ONEQ) closed 0.7% higher. The gain in the S&P 500 erased one half of Friday’s losses, but the Nasdaq only reclaimed slightly more than one third of its prior day’s losses. The Russell Small Cap Index (IWM) showed relative weakness and barely bounced yesterday. Overall, yesterday could be viewed as a typical correction to the type of selloff that we saw last Friday.

Although the broad market closed higher yesterday, it did so on lighter volume. The total market volume for both the NYSE and Nasdaq came in 12% lighter than the previous day. Last Friday was not technically a “distribution day” because, even though the major indices closed sharply lower than the previous day, the volume was slightly lower than the previous day. By itself, this would be considered a bullish factor for the market. However, it would have been more bullish to see yesterday follow up with a higher volume up day. Last Friday’s selloff on lighter volume indicated that the sellers were not heading for the exit doors en masse, but yesterday’s gains on even lighter volume indicated the buyers are not exactly jumping back in either. You can learn a lot by assessing the changes in total market volume in relation to each day’s prices, which is why we focus so much time on discussing volume every day. Volume is the one technical indicator that never lies and is amazingly accurate for showing what is really happening beneath the service, even when the market is choppy. Right now, the market’s volume patterns are indicating indecision, as explained above. We will, however, continue to monitor this key market vital for any changes that would indicate a resumption of the primary uptrend or hint at further price correction.

When predicting how much an index will correct in the opposite direction of a trend, Fibonacci is a great tool that produces accurate results. When the S&P 500 Index gapped up yesterday morning, the 38.2% Fibonacci retracement level from yesterday’s low to Friday’s high acted perfectly as resistance and caused the index to head back down to test the previous day’s low. The S&P subsequently rallied during the mid-day doldrums, but once again stopped immediately upon running into its 38.2% retracement. Finally, a buying surge into the final thirty minutes caused the index to break above the 38.2% level, at which point the S&P 500 ran into and closed at its 50% Fibonacci retracment level. The 15 minute chart of the S&P 500 Index below illustrates these retracement levels:

Based on a positive reaction to some tech companies after the close yesterday, the market is poised to gap up as of the time of this writing. However, it is important to note that the market has basically been discounting positive earnings reports even on days when there was positive after-hours action the night before. Yesterday’s gains caused the major indices to each close in the middle of last week’s range, aka “the danger zone.” Whenever an index or stock is trading in the middle 40% of its recent range, we commonly refer to it as “the danger zone” because momentum can quickly and easily shift to either direction at any time. It is difficult to predict which direction an index will go when it is in the middle of its range. Lately, this has been resulting in choppy conditions with no real direction either way.

The primary resistance level to watch today will be last Friday’s highs. Those levels are as follows: SPY 105.63, DIA 98.37, ONEQ 78.14. In addition, you could measure the Fibonacci retracement levels from yesterday’s lows up to the highs of October 15. This range represents the entire downward move we have recently seen and will provide you with even more important Fibonacci retracement levels than simply measuring the range from Friday’s high instead. As for support, all of yesterday’s range, down to the low of the day, will provide a base of support. The Nasdaq has been showing the most relative weakness lately due to weakness in the Biotechs. However, the semis have been strong and could lead the Nasdaq higher today. In summary, I contend that, as long as the market keeps chopping around in a range, there is still no reason to be aggressive on either side of the market. Odds favor trading sectors with relative strength or weakness rather than the broad-market ETFs.

I will close today with an appropriate quote from one of my favorite trading-related books, Reminiscences Of A Stock Operator by Edwin LeFevre. “There is the plain fool, who does the wrong things at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily — or sufficient knowledge to make his play an intelligent play.” Therefore, until the market shows us a reason to do otherwise, we will continue trading with reduced share size, less quantity of trades, and tighter stops.

Today’s watch list:

RTH – Retail HOLDR

Trigger = below 91.20 (below yesterday’s low)
Target = 89.70 (20-day MA support)
Stop = 91.90 (above 40-MA/15 min.)

Notes = The Retail sector started to roll over last Friday, but bounced yesterday with the broad market. If there is further broad market weakness today, we expect RTH to break below yesterday’s low and head down to the 20-day MA. However, note that we will only short RTH if it breaks yesterday’s low.

Since RTH sometimes trades with a wide spread, remember to use limit orders and also follow $IRH.X, which is the index for RTH. It shows you the fair value of RTH without the wide spread.

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:

    PPH long (from October 20) –
    bought 74.11, sold 73.60, points = (0.51), net P/L = ($54)

Open Positions:

    PPH long (from October 20) –
    bought 74.00, stop at 73.45, unrealized points = + 0.17, unrealized P/L = + $17


We bought PPH yesterday morning, but our entry was a bit premature and we were stopped out for a small loss. However, PPH reversed into the close and we re-entered PPH after it formed a bullish hammer candlestick pattern. We have set the stop at 73.45, which is just below yesterday’s low.

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