The Wagner Daily


Yesterday’s market action was rather uneventful as the major indices each closed approximately 0.5% lower on the heels of the previous day’s gains. Intraday trading action was once again erratic and filled with false breakouts, failed breakdowns, and intraday reversals. By 2:00 pm EST, the major indices had broken out and rallied to new intraday highs and also broken just above their respective highs of the previous day. However, the breakout quickly failed, causing the major indices to go from their intraday highs down to their intraday lows within a mere 30 minutes. But, of course, the market did not sell off from that point either and instead chopped around, closing slightly higher than its intraday lows. Unfortunately, this lack of follow-through is typical of the action we have been seeing in the broad market lately and is the primary reason why we have been avoiding trades within SPY, DIA, or other broad-based ETFs. There is simply too much indecision out there right now that is making it quite risky to stay with a broad market ETF position for more than a day. Instead, odds have favored trading individual market sectors such as BBH, RTH, or OIH, as we have done the past few days.

Volume in the NYSE came in 4% higher than the previous day, technically making yesterday a distribution day because the S&P closed lower than the previous day. However, volume in the Nasdaq was a few percent lower than the previous day, so the Nasdaq’s lighter volume did not confirm the NYSE distribution day. Basically, it was just an “inside day” in which the major indices traded completely within the trading range of the previous day. Needless to say, those are typically not the best types of trading days because they lack intraday trends.

In addition to looking for specific chart patterns to initiate new ETF trades, the most important element we look for is a sector ETF that is exhibiting either relative strength or relative weakness to the broad market. By relative strength, we are NOT referring to the RSI indicator, but simply how the ETF trades in relation to the S&P 500 or Nasdaq Composite. Because institutional money is always at work, money will flow into a particular sector as it flows out of another. If you can spot which sectors money is going out of or in to, you can trade in the same direction as the institutions, which is always a better risk and more profitable than fighting the “big boys.”

By trading based on relative strength or weakness, you can simultaneously increase your potential profits while decreasing your risk. An ETF with relative strength will rally to new highs even as the broad market trades sideways. Conversely, an ETF with relative weakness will often set new lows, even as the market trades sideways. The more relative strength or weakness the ETF has, the more likely the trade will move in the proper direction. For example, if an ETF is so strong that it does not drop from its intraday high even when the S&P 500 does, guess what will happen to that ETF when the S&P eventually bounces? It will be the first to spike sharply higher! Therefore, your profit potential is larger. Conversely, an ETF that has relative strength will be the last to drop and will give you more time to exit with minimal losses, even if the S&P or Nasdaq heads South and sells off. This reduces your overall market risk. If looking for short positions, we want to short ETFs relative weakness to the S&P, which works the exact opposite way of buying an ETF with relative strength.

To increase the odds of a profitable trade even more, the most important and obvious things to do is ensure that you are trading in the same direction as the broad market. If the broad market is in an uptrend, then look to buy ETFs that are exhibiting relative strength as opposed to shorting ETFs with relative weakness. If, on the other hand, the market is in a downtrend, then odds will favor shorting ETFs with relative weakness as opposed to buying those with relative strength. However, what do you do when the market is indecisive, choppy, and not really trending either direction? You have two choices. The first is to simply sit on the sidelines and wait (never a bad idea). The second choice is that you can simultaneously buy an ETF with the most relative strength while shorting an ETF with the most relative weakness. This effectively “hedges” your risk so that if the market suddenly makes a sharp move in either direction, you can close the position that is opposite the direction of the market, but let the profits ride on the other one. This is exactly what we did yesterday by being short RTH (Retail), which had the most relative weakness, while simultaneously being long BBH (Biotechs), which had the most relative strength. As RTH was setting new intraday lows, BBH was setting new intraday highs — all while the S&P futures traded in a narrow and choppy sideways range. This enabled us to realize profits on both the long and short side at the same time, while trading the broad market ETFs instead would have resulted in getting chopped up. The chart below illustrates yesterday’s divergence between BBH, RTH, and the S&P futures. We used line charts instead of candlesticks so that you can more easily see the relative strength and weakness between each one. Study this chart carefully and notice how BBH showed relative strength and RTH showed relative weakness:

As you can see from the charts above, trading individual sectors that are showing relative strength or weakness to the broad market is a great strategy to use, especially on days when the broad market is indecisive and chopping around (as it has been lately). It enabled us to profit from a long position in BBH, while also profiting from a short position in RTH. Through buying the sectors with relative strength and shorting those with relative weakness, you will always increase your potential profits while decreasing your maximum risk. So, while chart patterns are important, relative strength is an additional strategy you can use to ensure you are in the proper sectors and not fighting institutional money flow.

Going into today, the highs of the past two days are the obvious resistance points to watch. Also remember that the S&P 500 is sitting in new 52-week high territory, but the Dow Jones and Nasdaq have not quite confirmed. So, the November highs will be key resistance for both of those indices. As for support, yesterday’s low is important. Below that, the 20-day MAs will be the next primary level of support. We still feel that avoiding the broad market is probably best right now until ALL THREE of the major indices confirm a clear breakout to new 52-week highs. Otherwise, you are likely to get chopped up — just look at the intraday reversals of the past two days.

Today’s watch list:

(Since we now have 3 simultaneous open positions, there are no new trade setups for today. Instead, we will focus on closely managing our open positions for maximum profitability and minimal risk.

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 (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:

    BBH long (1/2 position from Dec. 2) –
    bought 130.60, sold 132.85, points = + 2.25, net P/L = +

    QQQ short (HALF position, averaged from Nov. 26 and Dec. 1) –
    shorted 35.29 (avg.), covered 35.85, points = (0.56), net P/L = ($118)

Open Positions:

    RTH short (from Dec. 1) –
    shorted 92.72, new stop 94.10, target 85.50, unrealized points = + 1.36, unrealized P/L = + $136

    BBH long (1/2 position from Dec. 2) –
    bought 130.60, new stop at 130.00, target 134.95, unrealized points = + 0.40, unrealized P/L = + $20

    QQQ short (HALF position, averaged from Nov. 26 and Dec. 1) –
    shorted 35.29 (avg.), stop at 36.20, target 31.50, unrealized points = (0.41), unrealized P/L = ($82)


We bought a full position in BBH yesterday, per the morning newsletter. We sold half the position of BBH in the afternoon to lock in a 2 point gain, but kept the second half of the position overnight. RTH dropped sharply yesterday, putting our open short position firmly in the money. As such, we have lowered the stop in RTH down to 94.10. We also covered half of the QQQ short position to reduce risk, but remain short a half position based on the head and shoulders pattern on the daily chart.

Edited by Deron Wagner,
MTG Founder and President