The Wagner Daily


After beginning yesterday with minor weakness, the major indices each corrected from Monday’s selloff and closed the day slightly higher. Once again, the Dow continued to outperform the other indices while the Nasdaq lagged behind. The Dow regained all of Monday’s losses and closed 1.1% higher, while the S&P 500 Index regained exactly 50% of Monday’s losses and closed 0.7% higher. The laggard Nasdaq only regained about one-third of its losses from the previous day and closed 0.3% higher. The Semiconductor Index ($SOX), which often leads the Nasdaq, actually closed a few points lower. Total market volume came in about the same as the previous day, but advancing volume outpaced declining volume by only 1.1 to 1 in the Nasdaq and 1.6 to 1 in the NYSE. While Monday’s actual losses from the previous day’s closing prices were minor, the severity of that selloff becomes much more apparent when you factor in the strong opening gap up that began the day. Given the large range of that selloff, it was not surprising to see a price correction and retracement yesterday.

This week marks the second week of clear sector rotation out of the more speculative technology-related stocks and into the traditional “old economy” type Dow stocks. However, because the Dow is such a narrow-based index consisting of only thirty stocks, it is rare that the Dow leads the broad market. In fact, today’s Investors Business Daily pointed out that the Dow outperformed the Nasdaq in 1986, one year before the big stock market crash of October 1987. Take a look at the two charts below that clearly illustrate yesterday’s price divergence between the Dow Jones Indu. Avg. and the Nasdaq Composite. We have plotted the Fibonacci retracement lines on both charts in order to illustrate how the Dow ignored its resistance, but the Nasdaq did not even rally back up to its 38.2% Fibonacci retracement level:

As you can see from the chart above, the recent divergence demonstrates that you can sometimes profit from simultaneously being short the Nasdaq (QQQ or ONEQ) and long the Dow (DIA). However, remember that this type of divergence is often short-lived, so don’t expect this trend to necessarily continue much longer. Blindly buying DIA or Dow-related stocks would be very dangerous right now given the weakness in the Nasdaq.

Looking at a daily chart of QQQ (Nasdaq 100 Index), you will notice several interesting things:

The first thing you will see is that QQQ has formed a QUADRUPLE top at the $36 price level since it first tested that price in October. This corresponds to a price of approximately 1450 in the Nasdaq 100 Index. The broader-based Nasdaq Composite has formed a similar chart pattern with its resistance at the 2000 price level. In addition to the quadruple top, notice that QQQ has broken below the lower channel support of its uptrend line from the low of March (that’s where the red trendline begins). If QQQ closes this week below the trendline, it will be the first weekly close below it since the rally began in March. Even when QQQ gapped up sharply this past Monday, notice how it was unable to get back above the trendline because prior support becomes new resistance once support is broken. Finally, note the bearish moving average crossover that we have been talking about all this week. The 20-day MA has crossed down below the 50-day MA for the first time since the rally began in March, indicating a potential reversal of trend. Again, confirmation of this would occur if the Dec. 10 low of 34.13 is broken, which would be the first major “lower low” for QQQ since March. So, continue to keep an eye on the Nasdaq and QQQ because there are many important technical events occurring in that index that could have a great impact on the broad market for the remainder of the month.

Today’s watch list:

There are no new plays today. However, we will send an intraday e-mail alert if we enter any new positions.

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 (from Dec. 16) –
    shorted 105.88, new stop at 108.70 (61.8% Fibo retracement), target
    100.30 (Oct. 24 low), unrealized points = (1.19), unrealized P/L = ($119)


Per intraday e-mail alert, we shorted IWM yesterday, which was showing even more relative weakness than QQQ. We are anticipating a break of its prior low at the $105 area. We also netted a + 4 point gain by covering a swing short (half position) in BZH yesterday morning in the Intraday Real Time Room. Profits from that trade, and all other Real-Time Room trades, will be reported separately in the next Wagner Weekly.

Edited by
Deron Wagner,
Founder and President