The Wagner Daily


For the second time in four trading sessions, the major indices trended steadily lower for the entire day.
Like last Friday, October 17, the broad market began selling off after the opening bell and subsequently formed lower highs and lower lows (the definition of a downtrend) all the way through to the closing bell. However, unlike October 17 in which the major indices opened flat, yesterday’s intraday downtrend occurred even after a sharp opening gap down. Both DIA (Dow Jones Industrial Average) and SPY (S&P 500 Index) closed 1.3% lower yesterday, but 0.8% of their respective losses came in the form of an opening gap lower. Likewise, ONEQ (Nasdaq Composite Index) closed 2.1% lower and 1.0% of that drop occurred on the opening gap lower.

Large opening gaps like we experienced yesterday are great if you have overnight positions on the correct side of the market, but the gaps are not fun if you become trapped on the wrong side. Fortunately, we were equally hedged on both sides going into yesterday morning, which enabled us to break on our overnight positions. Despite the strong closing price and breakout of PPH (Pharmaceutical HOLDR) the previous day, it gapped down BELOW its previous day’s low! Technically speaking, it is rare for this occur, but it happened nevertheless and we were forced to take the stop for a 72 cent loss on PPH. However, we also came in short DIA (Dow Jones) from the previous day and covered it for a profit of 79 cents when it hit the intraday trailing stop. So, it was basically a wash between those two trades. Large opening gaps can also make it difficult to profit from intraday trades because the market often corrects by time and merely trades in a tight and sideways range after the gap, but there was enough selling momentum to form an intraday downtrend despite yesterday’s gap. This enabled us to profit from an intraday trade in SPY short, which we called in the ETF Real-Time Room. We also sold our gold stocks into strength yesterday and netted a nice profit. If you would like to learn more about how we manage unexpected opening gaps, check out the MTG Opening Gap Rules.

While the financial media was talking about how negative yesterday’s losses were, many intraday traders were simply pleased to see a trend once again remain intact for an entire day. As short-term ETF traders, we can sell short as easily as going long, so our profitability is much more dependent on how well the market trends rather than which direction it trends. If you have been actively trading the markets over the past month, I am sure you will agree that it has been a welcome change to break out of the choppy, sloppy range that has been prevalent through most of October.

In addition to the opening gap, another factor that differed from last Friday’s selloff was yesterday’s volume. As you may recall, total market volume during last Friday’s selloff came in slightly below the previous day. However, volume increased by 11% in the NYSE yesterday, which means that yesterday was a bearish “distribution day” in the NYSE. But, volume in the Nasdaq came in 1.2% LOWER than the previous day, which was actually a small bit of comfort to the bulls, at least for the time being. Breadth was firmly negative in both the NYSE and the Nasdaq as declining volume outpaced advancing volume by a margin of more than 3 to 1. We warned in yesterday morning’s Wagner Daily that volume breadth had begun deteriorating, even though prices closed higher on Tuesday. More importantly, formerly market-leading “high flyer” stocks have begun to show some serious signs of weakness over the past few days. It’s less important when companies such as IBM, Merck, or General Electric are showing weakness because they are not market leaders in the first place. But when high growth stocks that have been market leaders (such as ERTS, AMZN, EBAY, NTES) begin showing relative weakness and breaking their 20 and 50-day moving averages, it is often a sign of an impending broad market correction. So, keep an eye on the volume and price action of the market leaders over the next several days, even if you don’t personally trade them.

Yesterday’s selloff caused SPY (and the S&P 500 Index) to close just above support of its 20-day moving average. The daily chart of SPY below illustrates this:

Interestingly, the 20-day moving average of SPY is at 103.41 and yesterday’s low in SPY was 103.40. How’s that for the power of moving average to provide support! Similarly, both IWM (Russell Small Cap Index) and DIA (Dow Jones Avg.) closed within pennies of their respective 20-day moving averages as well. QQQ (Nasdaq 100 Index) and MDY (S&P Mid-Cap Index) both closed above their 20-day moving averages, but that makes sense because both indices were formerly leading the broad market.

As of the time of this writing, the futures are poised to give the broad market another whacking on the open. If each of the major indices open today near their pre-market prices, each broad-based ETF will be opening well below its respective 20-day moving average. In fact, SPY and DIA could open near their 50-day moving averages, a level that is very closely watched by institutions. Each of the major indices briefly traded below their 50-day moving averages during the last significant market correction in September, but they subsequently rebounded and went on to set new 52-week highs in the early part of October. Will that happen again? Only time will tell, but we can closely watch the volume and price relationship of the broad market for clues as to institutional activity. Remember to also watch the price performance of the market leading growth stocks. If they cannot stay strong, the stagnant “old economy” companies certainly will not do so either.

If you are still long any losing positions, don’t blindly cling to hope because it is a very dangerous and can put you in jeopardy of significant losses. Just honor your stops and cut those losses! Your job is NOT to make money every day, but to protect your capital when losing so that you will always live to make money another day. Without an account, you cannot make money. The streets are littered with traders who clung to their opinions in hopes of being right, even while ignoring what the market is telling them.

Today’s watch list:

(Due to the large opening gap down, our trade setups for today are invalidated. However, we will e-mail you an alert if we find any low risk swing trade setups that we enter today.)

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 (1/2 position from October 21) –
    shorted 97.59, covered 96.80, points = + 0.79, net P/L = + $76

    RTH short (from October 22) –
    shorted 90.76, covered 90.80, points = (0.04), net P/L = ($07)

    PPH long (from October 20) –
    bought 74.00, sold 73.28, points = (0.72), net P/L = ($75)

Open Positions:



See commentary above for explanations on the DIA and PPH trades. RTH triggered later in the day after it broke below its opening low, but we closed it out near breakeven because our entry price was not ideal due to the gap down.

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