The Wagner Daily


Much like last Friday, the major indices spent most of the day trading in a narrow, sideways range that showed little volatility in most of the major market sectors. Trading conditions were rather choppy and, on several occasions in the morning, the broad market attempted to break out, but failed and drifted lower. Similarly, several attempts at a selloff later in the afternoon lacked follow-through to the downside. So, the major indices simply oscillated in a tight range, within the previous day’s range, until buyers stepped in during the final thirty minutes of trading and once again pushed the Dow Jones and S&P 500 Index into the green. The Dow’s 0.6% gain yesterday was the fifth day out of six in which the index closed higher, each one a new 52-week high. Although “overbought” indexes can remain that way for quite some time, the Dow is really prime for a correction. The S&P 500 Index closed 0.4% higher, while the Nasdaq Composite squeezed by with a 0.2% gain.

The cyclical sector was clearly the market leader yesterday, especially in the auto manufacturer index, which saw huge gains by Ford (F) and General Motors (GM). Metal mining companies, especially aluminum and steel, continued to shine, as did other manufacturing industries. The heavily-weighted Semiconductor Index ($SOX) once again lagged the broad market and was a drag on the Nasdaq. Paid subscribers to the Intraday Real Time Room now have easy access to tracking all the leading stocks in each major market sector, including the cyclicals, on the all-new MTG Stalk Sheet. The first quarterly edition was e-mailed to all monthly subscribers yesterday morning. If you feel you should have received the Stalk Sheet but did not, just drop us an e-mail.

Not surprisingly, total market volume dropped sharply yesterday. Volume in the NYSE was 24% lower than the previous day, while volume in the Nasdaq dropped 32%. This decreased volume is typical during Christmas week, as many traders and institutions take a few days away from the markets. Expect volume to drop off even more throughout the remainder of the week. Unfortunately, the problem with extremely light volume days is that it is very easy for the market to reverse its intraday direction due to lack of participation in a given direction. That’s why the market spent the entire day just chopping around in a narrow range yesterday until it rallied during the final 30 minutes. Because the market lacked volume and conviction throughout the entire session, it only took a small amount of buying pressure to move the market higher. The problem, however, is that the market can just as easily move lower on minimal volume. Therefore, it is very important to exercise caution and not get too aggressive on either side of the market if you are trading the remainder of this week.

Yesterday’s trade entry in DIA short was a clear example of why it is often difficult to profit from low-volume days. We shorted DIA (Dow Jones Industrials) when it rolled over below support of its morning consolidation level at 102.90, which would typically reverse the direction of the trend. However, it lacked follow-through to the downside after breaking support and just hung out near our entry price. DIA subsequently rallied to within one penny of our stop on several occasions before finally stopping us out within the last thirty minutes of the day.

Because volume was so light during the closing rally, we re-shorted DIA into the close. While the daily chart of DIA is obviously very bullish, sometimes you need to simply consider the risk/reward of a trade. After a parabolic, multi-week rally in DIA, we’re willing to take the risk of a 30 or 40 cent loss for the potential to reap a multi-point gain when it corrects, which often happens in the form of an overnight gap down that you will miss if not already in the position overnight. Catching a top is something we rarely attempt to do, but if the proper risk parameters are in place, it can be very lucrative when you are right, while keeping losses at a minimum if wrong (or early). If you have not noticed, the Dow is now approaching resistance of its MONTHLY downtrend line from its all-time high. The chart below illustrates this key downtrend line, which aligns around the 10,500 level:

We expect the monthly downtrend line to act as strong resistance, especially with volume so light this week. Therefore, we continue to feel that thinking like a contrarian and being short the Dow right now is a good risk to take, as long as you always keep protective stops in place to limit losses if you’re wrong. As for the Nasdaq, its daily chart has been a choppy, sloppy mess over the past several months, so you probably don’t want to mess with QQQ or ONEQ for anything more than a quick daytrade. SPY (S&P 500 Index) is trapped between the weakness of QQQ and strength of DIA.

Note that the U.S. stock markets will close early at 1:00 pm EST tomorrow, December 24, and on Friday, December 26. The markets are closed all day on December 25 for Christmas Day. The Wagner Daily will be published every day except December 25. Happy Holidays from MTG!

Today’s watch list:

Due to the decreased volume of the shortened holiday trading sessions over the next several days, there are no new plays. We do, however, currently have two open positions listed below.

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:

    DIA short (from Dec. 22) –
    shorted 102.84, covered 103.25, points = (0.41), net P/L = ($84)

Open Positions:

    TLT long (from Dec. 22) –
    bought 87.17, stop at 86.60, unrealized points = (0.37), unrealized P/L = ($74)

    DIA short (from Dec. 22) –
    shorted 103.28, new stop 10 cents over 20-minute high, target 101.10, unrealized points = (0.31), unrealized P/L = ($62)


We bought TLT yesterday morning when it hit our trigger price, and are currently long. The MTG Opening Gap Rules did not apply with TLT because it actually opened BELOW our trigger price, then rallied through it. If, however, it would have gapped up to open above our trigger price, the gap rules would have applied. Per intraday e-mail alert, we shorted DIA when it broke below consolidation yesterday, but stopped out into the final 30 minutes. We then re-shorted DIA and are using a stop that is exactly 10 cents higher than the high of the first 20 minutes for DIA today (see commentary above for explanation on DIA trade and re-entry).

Edited by
Deron Wagner,
Founder and President