The Wagner Daily


After several failed attempts to break above the previous day’s high, SPY (S&P 500 Index) spent the rest of the day trading in a narrow and sideways range, completely within the previous day’s range. ONEQ (Nasdaq Composite Index) also spent the day in a tight, sideways range, but showed significant relative weakness to SPY. While SPY spent most of the day consolidating in the upper end of the previous day’s range, ONEQ did the opposite and traded near the previous day’s lows. This divergence was due largely to strength in a few sectors such as Oil Service and Pharmaceuticals, both of which helped prop up the S&P, while the Semiconductors and other technology-related shares showed relative weakness. Both the S&P 500 and Dow Jones Industrials closed a few points higher, but the Nasdaq Composite closed fractionally lower. Not surprisingly, total market volume also came in lower than the previous day on both the NYSE and Nasdaq. Therefore, not many broad conclusions can be drawn specifically from Friday’s trading action.

Once again, last Friday’s narrow and choppy range made it challenging to profit from intraday trading of the broad-based ETFs such as SPY or QQQ, although several individual sector ETFs actually trended well. We netted nearly a 2-point gain in our long position in OIH (Oil Service HOLDR), which we re-entered last Thursday after being stopped out for a 30 cent loss on the first entry attempt. We only sold half the position and took the remaining shares long over the weekend because we anticipate further follow-through this week based on last Friday’s relative strength in that sector.

The profitable re-entry in the OIH trade is a good lesson in trader psychology, particularly in the importance of not being afraid to re-enter a trade that still looks good, even if you were stopped out the first time. When I was a new trader, I did not like to re-enter trades in which I was just stopped out, even if the trade still looked good. However, I quickly learned the error of my ways after watching many of these stocks immediately reverse and head in the direction I initially expected them to go, but without me in them. Since then, I have discovered that my most profitable trades (on a percentage basis) are often the trades in which I was recently stopped out but I got back in after seeing more confirmation. Why is this? Simply because it is often difficult to enter at exactly the proper time, even though you may be totally correct with your analysis. Better yet, you can often get a better re-entry price than where you stopped yourself out. This gives you the benefit of limiting your losses, while also providing you with a lower cost basis in the position. Even if you re-enter at a worse price, it doesn’t really matter. Why miss a multi-point move in an ETF because you did not want to pay 20 cents more on your re-entry price? Of course, we never blindly re-enter a trade just to “revenge trade,” but if the trade still looks technically good after you were stopped out, it makes no sense to pass the opportunity by.

Looking at the charts of the major indices going into this week, I will be watching two things very closely: the highs of October 15 and the 20-day moving averages. Based on last week’s consolidation pattern, it is very likely that we will either see a strong breakout to new 52-week highs or a reversal back down to the 20-day moving averages. The choppy and range-bound action we have been seeing is indicative of a major battle that is heating up between the bulls and bears. Based purely on technicals and without involving fundamental analysis, both the bulls and bears have valid points to arm themselves with. The bulls rightfully argue that the primary uptrend of the broad market is still in place because the “dip buyers” once again stepped in and bought after the major indices tested their 50-day moving averages on October 24. The bulls also point to the fact that the major indices have held onto the gains from last Tuesday’s post-Fed rally in a bullish correction by time. On the other hand, the bears have equally, if not more important, points of contention.

Most significantly, bears are focused on the double top that was created on October 30 when the major indices gapped up to their prior October 15 highs, but were unable to break through to a new high. A failed gap up to a prior daily high that subsequently creates a double top is always a big warning sign that momentum is fading in a stock or index. The broad market again attempted to break out to new highs on October 31, but set a lower high than the previous day. In addition to the double top, don’t forget our recent discussion about the decreasing length of time between each subsequent test of the major indices’ respective 50-day moving averages. Looking at a daily chart of any of the major indices, you will see that each test of the 50-day moving average over the past year has been coming quicker and quicker. Additionally, notice that the number of days the major indices have been spending above the 20-day moving averages has also been decreasing. As an example, look at a daily chart of QQQ (Nasdaq 100 Index):

Looking at the chart above, the pink circles indicate breaks above and below the 20-day moving average. Notice that QQQ spent about 5 weeks above its 20-day moving average from August 18 through September 24. However, the next bounce back above the 20-day moving average lasted only 14 days, from October 3 to 22. Now, it looks as if QQQ could roll over back down to its 20-day MA after spending only three days above it. Are you noticing the pattern here? It’s too early to draw any conclusions about the near-term direction of the market and the uptrend is technically still intact. However, the quickening pace of the moving average tests are a big warning sign, especially if the market does not break the October 15 highs in the coming week.

With all these conflicting signals, we think it is dangerous to be aggressive on either side of the market right now. We are basically taking a “wait and see” approach to the market this week and will simply react to whichever direction the market heads. Experience of this type of price action we have recently been seeing will soon lead to a resolution, but it’s better to wait for that resolution to happen than to guess and risk significant losses. It is our opinion that we will soon see a major breakout to new 52-week highs OR a rollover right back down to the 50-day moving averages and subsequent break of the primary uptrend line. We will be watching closely and ready to react in either direction. For now, it’s a very choppy tug-of-war that has made it difficult to trade the broad market ETFs, so be patient and wait for the right opportunity to come along.

Today’s watch list:

PPH – Pharmaceutical HOLDR

Trigger = above 74.20 (above 20-day MA and Friday’s high)
Target = 75.95 (61.8% Fibonacci retracement of
last major downward move)
Stop = 73.50 (below 20 and 40-MA convergence on hourly chart)

Notes = The Pharmaceutical sector, which we have been stalking for a long reversal, began showing strength last Friday, and we anticipate further upside follow-through today. We will buy PPH after it breaks through its 20-day MA, but remember to use the MTG Opening Gap Rules so that we are only buying a break of the 20-minute high if it gaps up above our trigger price. We continue to feel there are better odds trading the individual sector ETFs rather than the broad-based ones. Also remember to follow $IPH.X, which is the index for PPH, because it shows a more accurate fair value 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:

    OIH long (1/2 position from October 30) –
    bought 54.70, sold 56.42,
    points = + 1.72, net P/L = + $85

Open Positions:

    OIH long (1/2 position from October 30) –
    bought 54.70, new stop at 54.90,
    unrealized points = + 1.45, unrealized P/L = + $73


We sold half of the OIH long position to lock in gains last Friday, but took the second half of the position over the weekend. We have raised the stop to 54.90, so we have now removed the risk from the trade, and will continue to trail a stop higher as we are able. We’ll keep you informed of any changes via e-mail.

Edited by Deron Wagner,

MTG Founder and President