The Wagner Daily


Volume returned to the stock markets yesterday and the major indices followed through on the heels of the previous day’s gains. Relative strength was clearly seen in the Nasdaq, led largely by the Biotechs (BBH), which finally bounced yesterday. Semiconductors (SMH) and Software (SWH) sectors were also strong. The Nasdaq Composite (ONEQ) trended steadily higher throughout the first half of the day, but ran out of gas in the afternoon. Nevertheless, it was a solid session and the Nasdaq Composite closed 0.8% higher.

Both the S&P 500 Index (SPY) and Dow Jones Industrials (DIA) lagged the Nasdaq yesterday, especially during the final thirty minutes of trading. The S&P 500 only closed 0.1% higher and the Dow actually closed 0.3% lower than the previous day. Nevertheless, there were pockets of strength within a few sectors. The Gold Index ($GOX.X) was a clear winner and closed more than 4.5% higher on the day. There is not yet an ETF that tracks gold, although such an ETF is expected to be released within the next several months. In the interim, you can create your own ETF by trading a basket of leading gold stocks such as NEM, ABX, and GFI. Oil Service (OIH) was also strong yesterday, as were the Pharmaceuticals, which benefitted our long position in PPH. Retail (RTH) was weak, although our short setup in RTH was not triggered. Even though the daily chart of PPH (Pharmaceutical HOLDR) is not yet showing a clean breakout, it is important to realize that a few of the leading stocks are breaking out. In particular, take a look at the daily chart of PFE (Pfizer) below:

As you can see, PFE broke above a downtrend line that has been in place for over five months. It also closed firmly above its 50-day moving average for the first time in several months as well. Volume picked up yesterday, which aids to confirm the breakout, and volume will further increase today because PFE just reported earnings pre-market. PFE currently holds a 24.4% weighting in PPH, while JNJ is the second largest component with a 17.6% concentration (click here to see a complete breakdown of the PPH components). Therefore, the movement of those two stocks alone will account for more than 40% of the price action of PPH. That is why it is often important to track the leading stocks within each sector because they will often predict the direction of the respective sector ETF, even if the chart for the ETF itself does not look as good.

Yesterday’s total market volume increased by 24% in the NYSE and 12% in the Nasdaq, compared to the previous day. This rise in volume was significant enough to push the volume readings above their 50-day averages in both the NYSE and Nasdaq. Since the Nasdaq closed higher and on higher volume, yesterday was technically considered a bullish “accumulation day” in the Nasdaq. However, I view the 24% rise in the NYSE volume as bearish because the S&P essentially closed flat and the Dow closed negative. When volume rises dramatically but prices do not advance, it is considered bearish because it usually indicates that institutions are selling into the strength. Therefore, you end up with an increase in trading activity, but no progress in prices. This is akin to simultaneously applying both the brake and gas pedal of your car. The net result is that you probably will not advance in the forward direction. Perhaps more importantly, breadth was barely positive as advancing volume outpaced declining volume in the NYSE by a margin of only 1.19 to 1, which was lower than the previous day. Overall, yesterday’s volume analysis gave us divergent signals between the Nasdaq and the S&P. These volume signals mean you need to be even more cautious on the long side of the market, although there may still be a few select sectors that offer a good risk/reward. Remember that volume never lies, although its signals often lead the market by a week or two.

Those of you who subscribe to the ETF Real-Time Room may recall that I was discussing how the hourly downtrend line of the S&P 500 (SPY) perfectly acted as resistance yesterday on several occasions during the afternoon session. I have annotated this trendline resistance on the hourly chart of SPY below:

Are you frequently using trendlines in your daily trading analysis? If not, you are missing out on one of the most accurate and easiest ways to anticipate key support and resistance levels in the indexes and sectors. When using trendlines, the most basic strategy is to buy when an index in an uptrend tests the lower channel support line or to sell short when an index in a downtrend rallies up to the upper channel resistance line. As you can see from the chart above, you could have anticipated the proper place to sell long positions and/or initiate short positions based upon the S&P’s numerous, but failed, attempts to break its hourly downtrend line. You can draw trendlines on any time frame, whether a 5 minute chart or a monthly chart. Obviously, the longer the trendline has been intact, the more powerful the trendline will be. When you have trendlines that converge with each other on multiple time frames, it acts as even more powerful support or resistance.

Going into today, watch the hourly trendline resistance on each of the major indices. Unless that trendline is broken, we have to assume the current short-term trend, which began four days ago, will resume in a downward direction. As for support, watch the lows of October 20. If those lows are broken, the major indices are likely to trade down to their 20-day moving averages in a hurry. You could short a break of the October 20 lows and keep a tight stop just above those lows, which would act as the new resistance level. But, then again, I would not be surprised to see more of the choppy action we have become so well accustomed to.

Today’s watch list:

RTH – Retail HOLDR

Trigger = below 91.65 (below yesterday’s low)
Target = 89.98 (20-day MA support)
Stop = 92.40 (above 40-MA/15 min.)

Notes = The RTH short setup did not trigger yesterday, but we still like the setup and are watching for an entry point today. Note the new trigger and stop prices as well. Opposing hammers on the daily chart indicate indecision, but we think RTH will resolve itself to the downside if it trades below yesterday’s and October 17’s lows. In case RTH gaps down below its trigger price, remember to use the MTG Opening Gap Rules, which basically state we will wait for a break of the opening 20-minute low before shorting. This protects against shorting a gap down and quick snap back up.

Since RTH often trades with a wide spread, remember to use limit orders and follow $IRH.X, which is the index for RTH. It shows you the fair value of RTH without the wide spread and can assist you in placing your limit orders. You can watch $IRH.X to track the price of RTH.

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:

    PPH long (from October 20) –
    bought 74.00, new stop at 73.90, unrealized points = + 1.03, unrealized P/L = + $103

    DIA short (1/2 position from October 21) –
    shorted 97.59, stop at 98.05, unrealized points = (0.01), unrealized P/L = ($1)


We remain long PPH and have trailed the stop higher to 73.90, ten cents below our entry price. In the event of an opening gap down to our stops, we will use the MTG Opening Gap Rules to manage the position, which basically states we will wait for a break of the 5-minute low before closing the trade. Per an intraday e-mail alert, we also shorted DIA yesterday before the close and the stop is posted above. As always, we will send an e-mail update today if any changes are made to the stops for PPH or DIA.

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