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The Wagner Daily


major indices each gapped up and quickly ran to new 52-week highs last Friday
morning, but, once again, the gap failed to hold and the S&P 500 and Dow
Jones both quickly sold off down to the prior day’s trading range. The Nasdaq,
on the other hand, continued to show relative strength to the S&P and Dow
and held above the prior day’s high for most of the session. After closing the
gap in the morning, the major indices spent most of the remaining session in a
tight and choppy sideways range. Although we have been seeing a recent trend of
rallying into the close, an afternoon rally attempt fizzled and, unlike recent
closing action, the sellers took control during the final hour. This caused each
of the major indices to close at their intraday lows and in the middle of the
previous day’s ranges. Nevertheless, QQQ (Nasdaq 100 Index) maintained its
recent trend of bouncing off its 200 period moving average on the 15-minute
chart for the third consecutive day. The chart below illustrates how well this
200-MA has been acting as support for QQQ:

DIA (Dow Jones Industrials) closed 0.8% lower, SPY (S&P 500 Index)
closed 0.7% lower, and ONEQ (Nasdaq Composite Index) lost 0.2% last Friday.
Declining volume barely outpaced advancing volume, but the total market volume
was slightly lower than the previous day. Therefore, we cannot interpret too
much exclusively from Friday’s volume analysis. For the week, the Nasdaq again
led the S&P and Dow by gaining 2.0%. The S&P 500 Index gained only 0.2%
for the week, while the Dow closed less than 0.1% higher.

afternoon’s selloff broke the broad market’s recent pattern of weakness in the
morning and strength in the late afternoon. The late afternoon rally that many
traders have been coming to expect simply did not materialize last Friday. This
in itself would not be that big of a deal, but it is important to realize that
the market also failed to react to some very bullish economic data that was
released on Friday morning. The U.S. Department of Labor reported the number of
new jobs created in October more than doubled analysts’ expectations and showed
the biggest gain since January. This news initially created a sharp spike in the
pre-market futures, but the gap quickly faded. Combined with the fact that the
broad market sold off into the close on Friday, this tells us that the market
basically ignored the strongly positive economic news.

In addition to
technical analysis, one factor that is very accurate in predicting future market
direction is how the market reacts to various news releases. As a general rule,
bull markets tend to shrug off negative economic and geopolitical news and rally
regardless, while bear markets usually ignore positive news. This is the reason
why it is never the actual news that matters, but how the market REACTS to the
news that matters. If a bull market usually ignores negative news, it would also
go without saying that positive economic news often spurs a sharp rally. But
what happens when positive, surprise economic news is released in a bull market,
but the market sells off instead? It often is an early warning that the market
may be due for a correction. If an employment report that DOUBLED the analysts’
expectations cannot spur a rally that day, what will? With most of the important
quarterly earnings reports now behind us and important economic data out of the
way, there may not be much of an impetus for further gains during the remainder
of the month. Putting all charts aside, mass market psychology is always at work
and it is therefore crucial to always pay attention to not the actual news that
is released, but simply how the market is reacting to various types of news.

Taking a look at the charts, last week’s price action appears to be just
one big mess of failed breakout attempts on the major indices. While the major
indices have not gone down much, they have also failed to follow-through with
their breakouts to new 52-week highs as well. When an indexes or stocks break
out to a new 52-week high, they typically rally much further due to the lack of
overhead price resistance, but the S&P 500, Dow Jones, and Nasdaq were
unable to do so last week. The hourly chart of SPY (S&P 500) below
illustrates last week’s choppy and indecisive trading. Note the double top that
has formed:

Unfortunately, not much has changed since I discussed how dangerous the
market conditions were last week. Swing trading continues to be challenging due
to the lack of intraday follow-through and surprise opening gaps in the opposite
direction of the previous day’s closing prices. While it is still possible to
profit from intraday trading, recent market conditions have caused us to shift
our intraday strategy from riding profits and using trailing stops to one of
quickly taking profits when they arise. While this is never the most profitable
way to trade, it is simply too risky to ride profitable trades with a loose stop
because the winners will often turn into losers by the end of the day if you
don’t remain nimble and take your profits quickly. If you only swing trade and
are not a daytrader, my advice is that you sit on the sidelines and wait for
either a CLEAR and CONFIRMED breakout to new highs in the broad market, OR wait
for a correction that actually causes the major indices to remain below their 20
and 50-day moving averages. As soon as one of those two things happens, we will
take a stance on the technical conditions. But, we’re taking a rather neutral
stance right now because it’s too difficult to tell which of those will happen
first. The only certain thing is that the best risk/reward is in cash right now.
Patience pays big dividends to traders, so wait for the market to come to you.
Don’t force the trades if there are not clear setups. Most importantly, remember
to always TRADE WHAT YOU SEE, NOT WHAT YOU THINK. The market never has and never
will care what you think.

Today’s watch list:

DIA – DIAMONDS (Dow Jones Indu. Avg.)

Trigger =
below 97.75 (below last week’s low and the 20-day MA)
Target = 96.30
(support of the 50-day MA)
Stop = 98.50 (above Friday’s close)

= The Dow has been showing the most relative weakness of the major indices, but
we only want to short on a clear break of last week’s lows, which also converges
with the 20-day MA.

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 Model.

Closed Positions:


Open Positions:



BBH gapped up above its trigger
price on Friday, but never broke above its 20-minute opening high. Therefore,
based on the MTG Opening
Gap Rules
, the play was invalidated and we passed it by. We were all cash
over the weekend.

Edited by Deron Wagner,
MTG Founder and

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