The Wagner Daily


The best way to describe last Friday’s market action is that the bulls narrowly dodged a bullet, thanks to a rally that kicked in thirty minutes before the close. For the third consecutive morning, the major indices began the day with a large opening gap down. This time the opening losses were attributed to a negative market reaction from Microsoft’s earnings report. Because Microsoft has an approximate 9% weighting in the Nasdaq, Friday’s 8% loss in Softee acted as a huge anchor on both the Nasdaq and the Dow. After opening near the previous day’s lows, the major indices settled into an intraday downtrend that remained intact until the final thirty minutes of trading, at which point a sudden rush of buyers caused the broad market to reverse earlier intraday losses.

The S&P 500, Dow Jones Indu., and Nasdaq Composite each closed slightly lower on the day, but the losses were only a small percentage of earlier intraday losses. In fact, both the S&P and Nasdaq futures contracts actually closed higher on Friday due to the continued influx of buying beyond the 4:00 pm market close (remember that the futures contracts trade until 4:15 pm). As such, the major broad-based ETFs such as SPY, DIA, and QQQ also closed with fractional gains, although the indices themselves closed with losses. Losses for the entire week were as follows: Nasdaq (2.4%), S&P 500 (1.0%), and Dow Jones Industrials (1.4%). Volume in the Nasdaq was 2% higher than the previous day, but fell 10% in the NYSE. Due to our tight trailing stop on the QQQ short position from the previous day, we covered the position for maximum profits near Friday’s intraday lows. In the ETF Real-Time Room, we also netted a small profit from a day trade in MDY long during the final hour.

The reason I said that “the bulls narrowly dodged a bullet” on Friday was because of the technical breakdown on the daily charts that would have occurred if the major indices would have closed near their intraday lows. We mentioned in the beginning of last week that the major indices would likely trade down to their respective 50-day moving averages within a few days of breaking below their 20-day moving averages. Not surprisingly, that is exactly what happened on Friday as each of the major indices traded below their 50-day moving averages on an intraday basis, but recovered to close above them. Notice the 50-day moving averages on the daily charts of QQQ (Nasdaq 100 Index), SPY (S&P 500 Index), and DIA (Dow Jones Indu. Avg.) below:

As you can see from the charts above, the 50-day moving average is a powerful support or resistance level that will nearly always cause an index to bounce. The major indices traded well below their 50-day MAs on an intraday basis, but each recovered and closed above it. This is because major moving averages, such as the 50-day MA, are a bit “elastic,” meaning that the price will not always reverse at the exact price of the moving average. Instead, prices will often trade just above or below the moving average before bouncing and resuming the prior direction of the trend. Friday’s closing rally could most likely be attributed to institutional program trading that kicked in when the indices traded within a certain percentage of their 50-day moving averages. Although not illustrated, it is important to realize that the lower channel support of the primary daily uptrend lines are just below each of the 50-day moving averages. You can connect each higher low, beginning with the March low, and you will see the primary uptrend line, which is actually more important than the 50-day moving averages. If and when the major indices approach that mechanical trend line, we will analyze it in more detail.

Notice what subsequently occurred the last two times the major indices tested their 50-day moving averages in August and September. The 50-day MA acted as a springboard to propel the broad market to new 52-week highs. Will that happen again, just as it did the last two times? While it is impossible to know for sure, the one thing that makes me cautious is the length of time that has been elapsing between each subsequent test of the 50-day moving average.

When in an uptrend, the less frequently an index tests a support level, the more solid the trend is intact. However, if the distance between each subsequent test of support begins to narrow, it often is an early warning sign that the trend is weakening because it tells us that there are less and less buyers to support new high prices each time. This is the scenario that is occurring right now. For example, look at the more expanded daily chart of QQQ below:

Notice that QQQ initially crossed above its 50-day moving average back in March. After doing so, QQQ never breached below its 50-day moving average until August, which was five months later. However, after bouncing off the 50-day MA and setting a new high in August, QQQ once again fell down to its 50-day moving average only six weeks later, at the end of September. After setting a new high in mid-October, QQQ again fell down to its 50-day moving average only three weeks after its prior test at the end of September. Do you notice the pattern there? The length of time between each subsequent test of support has been decreasing. If this pattern continues, you can figure out what will soon happen; the indices will soon revert to trading below the 50-day MA and possibly establishing a trend in the opposite direction. In addition to a shortened length of time between each subsequent test of the 50-day MA, notice also how each recent breakout to a new 52-week high has been less of a percentage breakout than the previous one. In other words, each rally to a new 52-week high has barely taken the major indices above their previous 52-week highs. This aids to confirm my initial analysis that the buyers have been less prevalent on each new breakout. Furthermore, we have been seeing more bearish distribution days in which volume has been increasing on the down days.

Although the warning signs discussed above are certainly valid, it is impossible to know how long the market will continue to find support at its 50-day moving average, nor does it really matter. As long as the primary uptrend remains intact, your odds of success are probably going to be greater on the long side of the market. But it is important to be prepared for a possible reversal so that you are not blindsided if/when it happens. Remember that previous support levels act as new resistance once the support is broken. Therefore, expect the 20-day moving averages, which are now just overhead, to act as resistance for the major indices. The exact levels of the 20-day moving averages are listed on the charts above. Most importantly, we will be looking for changes in volume if the market attempts to follow-through on Friday’s bullish reversal. If volume sharply increases, along with price, it will increase the odds of further gains. If not, then one wave of selling could quickly push the major indices back below their 50-day MAs. We’ll keep you informed of what we see this week. Tomorrow there is also an FOMC meeting on interest rates, which are expected to remain the same. As you enter this week, remember to always TRADE WHAT YOU SEE, NOT WHAT YOU THINK!

Today’s watch list:

IWM (Russell 2000 Small Cap Index) has been showing the most relative weakness and was one of the only major ETFs that did not recover much off its 50-day MA. Therefore, we are looking at shorting IWM if it breaks below Friday’s low. We also liked the relative strength in MDY (S&P Mid-Cap Index) and anticipate that ETF being strong if the broad market rallies today. The Biotechs (BBH) also may run today after reversing Friday. However, the broad market is gapping up in the pre-market after bouncing off 50-day MA support on Friday. Therefore, the futures are poised to open in “no-man’s land,” meaning there are not any low risk ETF trade setups on the long or short side. As such, we are not listing any “official” trade setups today, but will send an e-mail alert if/when we spot any low-risk swing trades today. We’ll know a lot more after we see how today closes.

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:

    QQQ short (HALF position from October 23) –
    shorted 34.25, covered 33.70 (avg.), points = + 0.55, net P/L = + $104

Open Positions:



Per an intraday e-mail alert, we used a trailing stop to lock in gains on the QQQ short. We were flat over the weekend.

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