The Wagner Daily


After opening relatively flat, the major indices spent most of the day consolidating in a choppy, narrow range, near the lows of the previous day. A sell program hit the broad market around 2:30 pm EST and caused each of the major indices to break to new intraday lows and below their respective lows of the previous day. However, as the market has had a tendency to do lately, it reversed an hour later and rallied during the final thirty minutes of trading. The rally, however, was not enough to break through resistance from the morning trading range. As such, each of the major indices closed in the middle of their intraday trading ranges, slightly below their respective closing prices of the previous day. The Dow Jones Industrial Average closed flat, the S&P 500 Index lost 0.1%, and the Nasdaq Composite shed 0.2%.

Yesterday’s total market volume in the Nasdaq rose 8% over the previous day, making yesterday the second consecutive “distribution day” in the Nasdaq and the third within one week. While a bull market can usually handle one or two distribution days in a short period of time, three or more often serves as a leading indicator and warning that further losses may be in store. Confirming the “distribution day” is the fact that declining volume outpaced advancing volume by a margin of 2:1. Therefore, even though the Nasdaq barely closed lower on the day, a thorough analysis of yesterday’s internal volume reveals a more bearish performance than what the actual closing prices may have represented. The one positive, however, is that volume in the NYSE actually declined slightly, which is considered a positive when the S&P and Dow close lower on the day.

As anticipated, the S&P 500 finally lost its prior relative strength against the Nasdaq, and both indices traded relatively in sync with each other. As we have been discussing, the Nasdaq has been leading the way lower over the past several weeks, while both the S&P 500 and Dow Jones Industrials have held near their 52-week highs. But yesterday was the first day in many in which we actually saw slight weakness in the S&P, relative to the Nasdaq. As you may recall, we discussed the likelihood of this occurring in yesterday’s Wagner Daily because it is rare for the S&P 500 or the narrow-based Dow Jones Indu. Avg. to continue showing gains for an extended period of time without the Nasdaq leading the way. Taking it a step further, Tuesday’s technical break of support in the Semiconductor (SOX) Index has been weighing heavily on the Nasdaq, which is finally starting to weigh on the other major indices as well.

Hopefully, some of you were able to profit from shorting the Home Builder sector that we discussed in yesterday morning’s newsletter. As we mentioned, there is not currently an ETF that tracks the index, but every Home Builder stock we listed in yesterday’s newsletter sold off sharply, and on high volume. Although the Dow Jones U.S. Home Builder Index ($DJUSHB) dropped 4.2% on Tuesday, it got whacked even harder yesterday and lost an additional 5.3%. That totals nearly a 10% drop in just two days! However, given the huge gains the index has seen over the past year, it should not be surprising to see such a sharp drop. The more parabolic the rally, the faster and harder it will drop when it corrects. The key, however, is to wait for confirmation of a correction and not trying to short a top because that is a dangerous game to play with any stock or index. That’s why we waited until after the index showed steep losses on Tuesday before we presented the idea of shorting it yesterday morning. Taking a look at the daily chart of the index, notice that it closed below its 50-day moving average (for the first time since September 10). Also note the big volume spike yesterday, which confirmed the weakness:

Based on yesterday’s action, both the Nasdaq Composite and the Nasdaq 100 Index remain below their 50-day moving averages, as does the SOX index. But the most notable thing about the daily chart of the Nasdaq is how close the 20-day moving average has come to crossing down below the 50-day moving average, which would technically generate a sell signal. While the 20-day MA is still above the 50-day MA on the Nasdaq Composite, the daily chart of the large-cap Nasdaq 100 Index shows the 20 and 50-day MAs nearly perfectly converging. Take a look:

Based on yesterday’s close, you can see that the faster-moving 20-day MA now remains only 3 points above the 50-day MA (circled in orange). If the index continues to trade below the 50-day MA for several more days, the 20-day MA will have crossed down below the 50-day MA. This is technically significant because the last time the 20-day MA was trading below the 50-day MA was back in March, when the current primary uptrend began. A cross of the 20-day below the 50-day MA would probably kick in institutional program selling that initiates trades based on moving average crossovers. Also, on the chart above, you will see the primary uptrend line from the March low (in blue). Notice how the Nasdaq 100 traded below this trend line on an intraday basis, but recovered to close above it yesterday. However, a closing price below yesterday’s low would technically break the current primary uptrend line. The key test would then become whether or not the Nasdaq holds above its prior “swing” low from November.

The Nasdaq’s technical picture continues to remain more bearish than that of the S&P 500 and Dow Jones Industrial Average. The S&P 500 Index sold off to test its 20-day moving average yesterday, but recovered to close above it. The Dow is still hanging tough near its 52-week highs and has not even tested its 20-day MA yet. Therefore, we would not be surprised to see another test of the 10,000 level in the near future. As you will see in the Daily Reality Report below, we remain short QQQ (Nasdaq 100 Index) and IWM (Russell 2000 Small Cap Index), as well as long OIH (Oil Service HOLDR), each with unrealized gains. We also initiated a short position in SPY (S&P 500 Index) when it broke support yesterday afternoon. However, we are cautious about shorting DIA (Dow Jones Industrial Average) right now due to its relative strength. In fact, DIA may even be a good long position to hedge the other short positions. Until tomorrow, have a good trading day!

Today’s watch list:

Since MTG is already engaged in four simultaneous open positions, there are no new trade setups for today. Instead, we will focus on closely managing the open positions for maximum profitability and minimal risk. Any changes to stops or profit taking will be e-mailed to you, as always, via intraday e-mail alert.

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:


Open Positions:

    IWM short (full position, from Dec. 9) –
    shorted 106.89, stop 107.85, target 103.90, unrealized points = + 1.28, unrealized P/L = + $128

    OIH long (full position, from Dec. 5) –
    bought 58.05, new stop 58.20, target 60.40, unrealized points = + 1.22, unrealized P/L = + $122

    QQQ short (full position, from Dec. 9) –
    shorted 34.83, stop 35.10, target 33.75, unrealized points = + 0.27, unrealized P/L = + $108

    SPY short (full position, from Dec. 10) –
    shorted 106.43, new stop 107.20, target 103.70, unrealized points = (0.30), unrealized P/L = ($60)


We remain long a full position of OIH and short full positions of IWM and QQQ. New stop for OIH is listed above. SPY also triggered, per yesterday’s newsletter, and we have also set a new stop above. Be on the lookout for e-mail updates regarding any changes to stops or profit taking intraday.

Edited by Deron Wagner,
MTG Founder and President