The Wagner Daily


Yesterday was a prime example of the type of trading action we discussed in yesterday morning’s Wagner Daily. Despite the breakout to new 52-week highs on Monday, the major indices once again lacked follow-through and closed lower than the previous day. Both the S&P 500 and Nasdaq Composite lost 0.5%, while the Dow Jones closed 0.2% lower. The trading range was tight and the day was filled with false intraday moves that didn’t really go anywhere. Volume was 2% higher in the NYSE, but 2% lower in the Nasdaq. The day technically met the definition of a bearish “distribution day” because the S&P closed at a lower price, but on higher volume than the previous day. However, it really did not have the feel of heavy selling and instead felt more like an indecisive and confused market. We’ve been warning about overtrading in the current environment and yesterday’s price action clearly demonstrated the need for trading conservatively. It sure wasn’t the type of price action you would expect to see after a breakout to new 52-week highs in each of the major indices.

One of the reasons I like to use candlestick charts is because they make it easy to view areas of support and resistance, based upon the wicks or “tails” that form at such areas. Looking at the daily charts of the major indices, you will see long wicks above the candlestick bodies of the past two days. These wicks to the upside tell us that the market keeps attempting to break out on an intraday basis, but is failing and closing in the middle or lower end of its intraday range. For example, take a look at the daily chart of SPY (S&P 500):

Notice the wicks (circled in orange) from the past two days, just over the $106 price level. This indicates that SPY has traded above the 106 level on an intraday basis, but has closed below it both times. Therefore, the area of 106 and above has become a range of resistance. You will also notice that SPY closed at 106 on Monday and opened at the same level yesterday. Yesterday’s close in SPY was also below the intraday high from October 15, which further adds to the resistance. The breakout to new highs has basically failed several times, but we really cannot declare a double or triple top because the S&P has NOT sold off significantly after failing to hold the breakout attempts. Instead, the S&P is just hanging out in a bullish consolidation pattern near the top of the range, but is having difficulty going higher right now. Daily charts of the Nasdaq and Dow are both showing a similar pattern as well. The market is giving so many mixed signals that is leaving many pro traders scratching their heads.

One sector you may want to keep an eye on today is the Home Construction sector ($DJUSHB). The Home Construction index has been on a rampage for quite a long time and has netted significant gains for those who have been holding long positions. While the index does not show any immediate signs of breaking its uptrend, it may be set up for a shortable price correction over the next several days. Specifically, the index has become technically overbought based on an overextension away from its 20-day moving average, and an even further extension away from its 20-WEEK moving average. While this alone is not a good reason for selling short, the index also formed a bearish “inverted hammer” candlestick pattern on its daily chart. If the index opens at or below yesterday’s low, it is likely that it will trigger at least a few days of selling that will most likely take the index down towards its 20-day moving average. However, the trade setup is only valid if the index opens flat or lower than yesterday’s close. Below is a daily chart of the US Home Construction Index. I have circled the bearish candlestick pattern from yesterday:

There is not an ETF for the Home Construction Index, but you may consider shorting a few individual stocks if you like the trade setup. We shorted RYL and CTX in the Intraday Real-Time Room yesterday and took both trades overnight. Other stocks in this index are: LEN, BZH, TOL, PHM, and KBH.

Unfortunately, the technical picture of the broad market has not changed much going into today. Until the market shows me otherwise, I am going to assume that the recent pattern of choppy intraday moves and false breakouts and breakdowns will continue. Like I said before, we are fully prepared to buy the broad market IF the major indices convincingly break out to new highs AND on strong volume. Likewise, we’re ready to sell short a confirmed break of moving average support as well, specifically the 20-day MAs. However, until one of those two scenarios occurs, we’re going to keep it very light both in quantity of new swing trades and share size. If you MUST trade despite the challenging overall conditions (which probably means you have a problem), remember that you have better odds of success by trading individual sectors with relative strength or weakness rather than the broad market. Capital preservation remains our number one priority right now. There will be plenty of time to focus on making profits after the market shows its hand and follows-through for more than a day.

Today’s watch list:

SMH – Semiconductor HOLDR

Trigger = below 42.90 (below hourly uptrend line)
Target = 41.75 (support of the 38.2% Fibo retracement)

Stop = 43.38 (above yesterday’s close)

Notes = Just looking to short a quick price correction on this index, but only if it trades below support of its hourly uptrend line.

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 November 3) –
    bought 74.28, sold 73.40, points = (0.88), net P/L = ($91)

Open Positions:

    OIH long (1/2 position from October 30) –
    bought 54.70, new stop at 54.65,
    unrealized points = + 0.55, unrealized P/L = + $28


OIH gapped down below our initial stop, but we used the MTG Opening Gap Rules to manage the position. This dictated that we mark the low of the first five minutes of trading and adjust the new stop to just below that level. We did as such and OIH immediately reversed off the opening gap down, closed strong, and never hit the adjusted stop. If OIH breaks above yesterday’s high, we anticipate a re-test of the October 31 high at 56.40 area. New stop is near breakeven at 54.65.

Edited by Deron Wagner,

MTG Founder and President