The Wagner Daily


As much as I would love to tell you otherwise, I must admit that the recent broad market action has really left me scratching my head, in a perplexed state of pondering. The recent pattern of mid-day trend reversals, failed breakouts, and false breakdowns once again continued yesterday, but this time it was more severe than previous days because of the test of the 2000 price level in the Nasdaq. After chopping around with an upward bias in the morning, the Nasdaq Composite suddenly broke out and spiked to the 2000 level in the early afternoon. However, it only stayed there for about 30 seconds as traders immediately sold into that level and eventually triggered a large selloff into the close. This end-of-day selloff caused the Nasdaq Composite to drop from a new 52-week high of 2000 down to a new low of the week. The 5-minute chart of the Nasdaq below illustrates the failed breakout and subsequent selloff into the close:

The 2000 level in the Nasdaq Composite is not a technically significant number because there are no specific trendlines, moving averages, or support/resistance levels at that price. However, mass human psychology always tends to put an emphasis on the importance of large round numbers and therefore the importance of the 2000 level becomes a self-fulfilling prophecy. It becomes important only because everyone thinks it is important. A good example is the level of excitement that was generated by the general public and financial press became when the Dow first traded above 10,000, back in 1999. The reality is that 10,000 is not much different than 9,965, but mass human psychology always places emphasis on large round numbers; hence, you should be aware of them too. By the way, the Dow came within 60 points of crossing back above 10,000 yesterday, which is probably a more important number than the Nasdaq 2000. So, keep an eye on the price level of the Dow over the next few days because I guarantee we will see some whippy action as the Dow tests that level.

Perhaps the most significant thing about yesterday’s selloff is that it came on higher volume than the preceding failed breakout over the 2000 level. In fact, total market volume for the Nasdaq yesterday was 24% higher than the previous day and the highest overall volume day since September 3, exactly three months ago. If the Nasdaq would have closed higher yesterday, this volume surge would have been quite bullish for the markets. But, since the volume surge came on the heels of sharp selling into the close, yesterday was a solid “distribution day,” which is marked by institutional selling. Confirming this was the fact that many high-flying market leaders were hit pretty hard yesterday. If the leaders start to crumble, it’s difficult for the market to remain strong. While one high-volume selling day does not necessarily mean the market will collapse, it is indeed a warning sign to be very cautious with any long positions, especially if we see two or three more distribution days within the next week.

Unfortunately, yesterday’s spike above 2000 in the Nasdaq Composite stopped us out of our QQQ short position by only 2 cents, right before the Nasdaq reversed sharply into the close. We have been sitting on QQQ short for a week, attempting to capitalize on the daily head and shoulders pattern, but covered yesterday because QQQ broke out to a new high for the week. Since the big resistance level was at 36.05, we tightened the stop down to 36.10 because we anticipated a quick and sharp rally when/if QQQ broke above 36.05. But, that is not what happened. Had we kept our original stop of 36.20, instead of lowering it to 36.10, we would still be short because yesterday’s high in QQQ was only 36.12. So, we were stopped out by only 2 cents, which is a bit frustrating. But, you have to accept that is going to happen sometimes and is just part of the trading business. By forgetting about it and moving on to the next trade, we were able to spot an opportunity to short HHH (Internet HOLDR), which we shorted, and it left us with an unrealized gain that was just as large as the gain in QQQ would have been if we were still short. Nevertheless, yesterday’s selloff put QQQ just above its 20-day MA, so we will be watching for a possible break below that level for short re-entry.

When an index fails a breakout at a key level and then sells off sharply to close at the intraday lows (as the Nasdaq did yesterday), the momentum typically leads to an opening gap down and resumption of downward pressure the next morning. However, as of the time of this writing, the Nasdaq futures are gapping UP over 12 points above yesterday’s closing price, with no major news to support it. Should we be surprised? Well, not really. This is typical of the tug-of-war price action the market has been strangely exhibiting recently. In fact, it would not even be surprising to see the Nasdaq completely ignore yesterday’s selloff and rally sharply back above yesterday’s high and the 2000 level. Anything is possible and it can be very dangerous right now to make assumptions such as “the market won’t do this or will do that.” But, the good news is that we have a choice to simply avoid trading the broad market ETFs altogether, which is what we have been doing recently.

Focus on trading individual sector ETFs such as SMH (Semiconductors), HHH (Internets), and BBH (Biotechs), rather than broad-market ETFs such as SPY (S&P 500), QQQ (Nasdaq 100), or DIA (Dow Jones Industrials). If you trade sectors that are exhibiting relative strength or weakness to the broad market, you have much better odds that your trade will resume in the direction of its trend, even if the broad market makes an erratic intraday reversal out of the blue. When the broad market begins trending in a normal fashion, we will resume our regular detailed analysis of the S&P, Nasdaq, and Dow. But, until then, we recommend you consider avoiding the broad market and saving yourself the headaches and frustration of the frequent intraday reversals that have been plaguing the market.

Today’s watch list:

(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 130.95, points = + 0.35, net P/L = +

    QQQ short (HALF position, averaged from Nov. 26 and Dec. 1) –
    shorted 35.29 (avg.), covered 36.09, points = (0.80), net P/L = ($166)

Open Positions:

    RTH short (from Dec. 1) –
    shorted 92.72, new stop 92.70 (breakeven), target 85.50, unrealized points = + 2.12, unrealized P/L = + $212

    HHH short (from Dec. 3) –
    shorted 47.03, new stop at 47.30, target 44.95, unrealized points = + 0.85, unrealized P/L = + $170


Yesterday’s morning selloff caused the remaining half of BBH to hit its trailing stop. But, the reversal in the early afternoon stopped us out of the QQQ short. We then shorted HHH (per intraday e-mail alert) when the Nasdaq reversed once again and sold off into the close. We also remain short a full position of RTH with a + 2 point unrealized gain.

Edited by Deron Wagner,
MTG Founder and President