The Wagner Daily


The major indices followed through on the previous day’s late afternoon reversal and rallied sharply out of the gates for the first 90 minutes of trading. The indices subsequently traded sideways for several hours, consolidating at their respective intraday highs, before making another leg higher into the final 90 minutes of trading. This caused both the S&P 500 Index and Nasdaq Composite to retrace their losses from the prior two days, while the Dow Jones Industrial Average continued showing relative strength and closed at a new high. The S&P 500 Index gained 1.1% to close at 1071, only 3 points shy of its prior high that was set on December 3. The Nasdaq Composite gained 2.0% and closed at 1942, which put the index back above its 50-day moving average, but well below its prior high of 2000 that was touched on December 3. Although the Dow only rallied 0.9% yesterday, it closed at a new 52-week high of 10,008 because it has been showing relative strength to the other indices for the past several weeks. That’s right, the Dow closed over 10k, which is actually an insignificant number on a technical basis, but an important number in the minds of retail investors because it is simply a large, round number.

Yesterday’s rally was broad-based and advancing volume sharply outpaced declining volume. However, the total market volume came in lighter than you would want to see in order to confirm a bullish move. Volume in the NYSE was basically unchanged from the previous day, but the Nasdaq volume came in 7% lower than the previous day. This means that, while the indices rallied firmly, there was not much institutional support behind the move, especially considering that we have recently seen three distribution days in the Nasdaq. If volume would have surged yesterday, it would have confirmed the rally, but we remain cautious about getting long here simply due to the lack of volume confirmation. Remember that volume is one of the most reliable leading indicators at your disposal because volume never lies! Ironically, it tends to be the one indicator that most retail investors and even some professional traders fail to analyze on a daily basis.

Unfortunately, yesterday’s rally stopped us out of the three short positions we had in QQQ, SPY, and IWM. While it is rare for us to have three simultaneous broad market positions, we had good entry points that provided a positive risk/reward ratio for being a bit aggressive. Since we were in the money with QQQ and IWM, we could have easily lowered our stops to break even, which would have eliminated all the risk from the trades. However, that would have also limited our profit potential. Remember that catching large, multi-point moves requires a correspondingly wider stop than you would use if simply daytrading or trying to catch a small move in an index. For example, the reason we were able to net 4 points in RTH short last week was because we used a 1.5 point trailing stop. A tighter stop would have reduced our risk, but would have also prevented us from netting four points in the trade. It is never fun to be stopped out of trades, but it is just part of the business that professionals accept. By maintaining discipline and consistently following the trading plan, Morpheus has maintained consistent profitability over the years, as our winning trading stats reflect.

We have been watching the 20 and 50-day moving averages on the Nasdaq 100 Index over the past several days in anticipation of a bearish crossover, which would be the first one since the primary uptrend began in March. While the 20-day MA has not yet crossed below the 50-day MA, they have now perfectly converged at the 1407 level. Since QQQ tracks the Nasdaq 100 Index, the daily chart of QQQ shows the same thing, except that the 20 and 50-day MAs have converged at 34.99. The daily chart of QQQ below illustrates this convergence:

Although the moving averages have converged at 34.99, the bearish crossover has not yet technically occurred. Furthermore, QQQ closed ABOVE this convergence yesterday, which invalidates most types of program selling that would look for not only a bearish crossover, but also a close below the moving averages. Our stop in QQQ was at 35.10 because it was just above the MA convergence at 35, which we did not anticipate QQQ rallying beyond. But, since it did, we view the Nasdaq’s performance over the next couple of days as being key. If QQQ remains above the 35.00 level for the next several days, we would not anticipate any sharp selling to occur. However, if QQQ is unable to remain above the moving average convergence and once again closes below it, it will increase the odds of the 20-day MA crossing down below the 50-day MA, and consequently the probability of program selling kicking in. Of course, the Dow is sitting at new 18-month highs, so the strong divergence between the major indices is likely to make the market choppy.

We will close with a couple of miscellaneous issues that may be of interest to you. First, many of our subscribers have been asking about the anticipated launch date for a U.S. ETF that invests in Gold. While the launch of such an ETF, which will go by the ticker GLD, is currently in the process of getting past regulation, a new ETF that invests in gold bullion was launched on the London Stock Exchange this week. On its first day of trading, December 9, approximately 8.2 million units representing 820,000 ounces of gold worth US$334 million were traded on the London Stock Exchange and in the secondary market. Click here to read the complete article detailing this launch in London.

On a separate note, for those of you who trade or follow the CME stock futures or e-mini stock futures, note that the lead month has changed for the quarter. The December contract (“Z”) has now rolled over to the March contract (“H”). So, you may need to update your trading software if this applies to you.

Today’s watch list:

PPH – Pharmaceutical HOLDR

Trigger = above 78.10 (above prior high from November)

Target = 81.90 (retest of July high)
Stop =
76.50 (below yesterday’s close)

Notes = It may not trigger today because it is still one point away, but we are looking at a potentially large breakout in the Pharmaceutical Index, specifically if PPH rallies above its prior highs from November. Weekly chart showing potential breakout as well, with not much overhead resistance. As we see more rotation out of the tech stocks, it is likely to flow into Drugs and other “old economy” sectors. If PPH does not trigger today, we will keep watching for entry next week. If it does trigger, realize the time horizon on this trade is intended to be several weeks to a month.

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:

    OIH long (HALF position, from Dec. 5) –
    bought 58.05, sold 58.65, points = + 0.60, net P/L = + $29

    IWM short (full position, from Dec. 9) –
    shorted 106.89, covered 107.84, points = (0.95), net P/L = ($98)

    QQQ short (full position, from Dec. 9) –
    shorted 34.83, covered 35.11, points = (0.28), net P/L = ($124)

    SPY short (full position, from Dec. 10) –
    shorted 106.43, covered 107.21, points = (0.78), net P/L = ($162)

Open Positions:

    OIH long (HALF position, from Dec. 5) –
    bought 58.05, stop 58.20, target 60.40, unrealized points = + 1.02, unrealized P/L = + $51


We took profits on half the OIH position when it broke below the previous day’s low, but remain long the second half of OIH with the same stop of 58.20. Each of the short positions were stopped out when the broad market reversed sharply yesterday. See commentary above.

Edited by Deron Wagner,
MTG Founder and President