The Wagner Daily


As I am sure you have already heard reported from the talking heads, the Dow Jones Industrial Average traded through the 10,000 level yesterday morning, but stayed there for LESS THAN ONE MINUTE before sellers immediately stepped in and eventually triggered a sharp selloff later in the day. Sound like a case of deja vu? This was exactly the same scenario that occurred when the Nasdaq Composite briefly touched the big round 2,000 price level on December 3 of last week. Since that date, the Nasdaq has been in a relatively steady downtrend. Given the recent technical weakness of the Nasdaq, but the relative strength of the Dow, it was not surprising to see the Dow trade up to the 10,000 level, but then immediately reverse. The major indices drifted lower throughout the morning session, but stabilized and traded sideways for several hours before the FOMC decision on interest rates was announced at 2:15 pm. After the announcement, the selloff intensified and created a very bearish technical picture for several of the indices (more on that shortly).

The Feds’ announcement to leave interest rates unchanged was no surprise, but it was their implication that the potential risk of inflation was now as great as the risk of deflation that caused a negative reaction in the markets. Unlike the past several FOMC meetings, the wording changed this time and it only served to aid a market that was already showing technical weakness to begin with. Despite the sharp sell off triggered by the Feds yesterday afternoon, the Dow still maintained the most relative strength of the major indices and closed only 0.4% lower on the day. The S&P 500 Index lost 0.9%, but the Nasdaq Composite closed 2.1% lower, with the heaviest losses coming from the Semiconductor Index, which dropped 4.3%. Unlike the reaction to the past several interest rate announcements, the bond ETFs (TLT, IEF, and SHY) all fell sharply. This tells me that the bond market is anticipating an increase in interest rates sooner rather than later, since interest rates are inversely correlated with the price of bonds. The major weakness in mortgage companies and home construction stocks yesterday also confirms the same. Although there is not an ETF for the Home Construction Index, I personally shorted four different home builders yesterday and plan to stay short unless the prior highs are broken. Below is a chart of the Dow Jones US Home Builders Index ($DJUSHB), which indicates the sharp 4% drop that may finally be signalling the end of the party for the home builders:

If interested in shorting the Home Builders, the big names to check out are: TOL, LEN, KBH, BZH, CTX, PHM, HOV, DHI, and RYL. Those that sold off yesterday on the highest relative volume were CTX and HOV, so they may make the best ones to short.

The most important thing to point out about yesterday was that volume increased versus the previous day by 12% in the Nasdaq and 20% in the NYSE. Since each of the major indices also closed lower on the day, this means that yesterday was a confirmed “distribution day,” which occurs when the broad market closes lower than the previous day, but on higher volume. Distribution days are bearish because they typically indicate institutional selling, rather than a mere lack of buyers on the down days. Yesterday was the second distribution day for the Nasdaq within the past five sessions. When you begin to have 3 – 4 of these “distribution days” within one to two weeks, it is usually enough pressure to cause a significant, multi-week selloff in the major indices. If you look at the bearish chart patterns that were formed yesterday, the higher-volume selloff becomes even more relevant. Let’s begin by looking at a daily chart of the Semiconductor (SOX) Index:

Looking at the chart above, notice that the SOX closed well below its 50-day moving average yesterday for the first time since August 8. As you know, the 50-day moving average is a closely watched level that usually provides support to indexes and stocks in an uptrend. The difference between yesterday and the last time the SOX closed below its 50-day moving average is that the index formed a double top on its last rally attempt, rather than setting a higher high. When you have a double top combined with a subsequent break of a 50-day moving average, it is usually quite bearish and points to lower prices. After the high was set on December 1, notice that the SOX had four consecutive down days, then formed a “doji star” candlestick at the 500 level. Since a “doji” usually marks a reversal of an index that has corrected for several days while in the context of an uptrend, yesterday’s inability for the SOX to follow-through on the “doji” and reverse back to the upside was quite bearish. Based on all these factors, we now anticipate the SOX index will drop down to its primary uptrend line from the February low (in blue) before seeing much buying action. The reason we point this out is because the Nasdaq usually follows the SOX index due to the heavy weighting of semiconductors within the Nasdaq. Without strength in the SOX, it is highly unlikely that the Nasdaq will rally. Yesterday’s break of the 50-day moving average for the Nasdaq Composite confirms this fact. Take a look at the Nasdaq Composite:

As you can see, the Nasdaq closed below its 50-day moving average yesterday after being above it for only 10 days. It also formed a “bearish engulfing” candlestick, meaning that it opened above the previous day’s high, but sold off to close below the previous day’s low. Regarding the break of the 50-day MA, we have been discussing for months that the length of time that the index has been spending above the 50-day MA has been greatly decreasing on each subsequent bounce off the 50-day. This has resulted in the formation of a “rounded top,” which can be seen by the proximity of the 20 and 50-day moving averages in relation to one another. Within a few days, it is likely that the 20-day moving average will cross down below the 50-day moving average, which would trigger another bearish sell signal. Most importantly, you want to keep an eye on the prior low of 1878 for the Nasdaq, which was set on Nov. 21. If this low is violated, it would represent the first “lower low” since the primary uptrend began in March. With a “lower low” would also come a “lower high,” which would technically signal the end of the primary uptrend that has been in place for about 9 months.

The technical charts of the Dow Jones and S&P 500 both look much better than the Nasdaq right now, but it is unlikely that these indexes will go anywhere without the Nasdaq leading the way. In fact, we anticipate that the S&P and Dow will soon begin to show weakness that the Nasdaq has been exhibiting for several weeks. Taking a look at the daily chart of the S&P 500 Index, you will see that the 1060 level is a key “pivot point:”

The 1060 level is important because it represents the previous resistance from late October and early November, which should now act as the new support level. While the S&P 500 has held above the 1060 level for the past three days, a close below that level today would be bearish for the index and would probably trigger a selloff down to its 50-day MA, just like the Nasdaq. As for the Dow, it has been showing the most relative strength, but is also one of the most narrow-based indices because it is comprised of only 30 stocks. So, I really doubt that strength in the Dow could be sustained if both the Nasdaq and S&P are heading lower.

We could see a bit of a bounce due to yesterday’s selloff today, but the technical picture is beginning to look more bearish than it has in a long time. As such, we initiated short positions in both IWM and QQQ yesterday (per intraday e-mail alert) and have listed the trade details below. In my opinion, this is a dangerous time to enter new long positions on a pullback because many of the former market leaders have been failing their uptrends and breakouts. This means that odds probably favor either initiating short positions or sitting on the sidelines. If you are long, honor your stops and don’t let a small loss turn into a painful one. As I have been shouting about, commodities, especially gold and silver, as well as the mining stocks, remain strong and seem to be one of the safest places for long positions right now.

Today’s watch list:

SPY – S&P 500 Index SPYDER

Trigger = below 106.44 (below 3-day low)

Target = 103.70 (retest of prior low)
Stop =
107.35 (above the breakdown point)

Notes = See comments on the S&P 500 support level at 1060 above. We will short SPY if S&P breaks corresponding level.

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:

    HHH short (1/2 position size, from Dec. 3) –
    shorted 47.03, covered 46.29, points = + 0.74, net P/L = + $72

Open Positions:

    QQQ short (full position, from Dec. 9) –
    shorted 34.83, new stop 35.10, target 33.75, unrealized points = + 0.40, unrealized P/L = + $160

    OIH long (full position, from Dec. 5) –
    bought 58.05, new stop 57.50, target 60.40, unrealized points = + 1.05, unrealized P/L = + $105

    IWM short (full position, from Dec. 9) –
    shorted 106.89, new stop 107.85, target 103.90, unrealized points = + 0.32, unrealized P/L = + $32


HHH short hit the trailing stop yesterday, locking in a gain of + 0.74. Per intraday e-mail alert, we also shorted both QQQ and IWM yesterday afternoon when they broke daily support and have adjusted the stops as per above. No changes to the OIH stop, which remains open.

Edited by Deron Wagner,
MTG Founder and President