The Wagner Daily


The last trading day of the year was marked with intraday volatility and indecision, but both the S&P 500 Index and Dow Jones Industrial Average closed with minor gains on the day, while the Nasdaq Composite closed slightly lower. Intraday trading action was more erratic than the mild closing price changes in the major indices would lead you to believe. The 15-minute chart of SPY (S&P 500 Index) below illustrates how the index traded from new high down to a new intraday low, back up to new intraday high, then sold off to close in the middle of its range:

As you can see from the chart above, it was a tricky day for intraday trading, so you probably did not miss much if you took the day off. But, aside from the intraday action, it was quite positive that both the S&P and Dow finished the year at new closing highs of 1112 and 10,453 respectively. Also, did you notice that the Nasdaq Composite finished the year 2003 at a closing price of 2003? This represented a closing price that was only six points below its high of the year, which was set the prior day. The Russell 2000 Index (small caps) showed a lot of relative weakness on the last day of the year and closed 1.6% lower, even though the S&P and Dow both closed approximately 0.2% higher and the Nasdaq Composite only closed 0.3% lower. Declining volume was marginally higher than advancing volume in the Nasdaq, which confirmed the relative weakness in both the Russell Small Caps and the Nasdaq. In the NYSE, advancing volume was fractionally higher than declining volume, but overall market volume remained below average levels.

We recently discussed the fact that the U.S. Home Builder sector ($DJUSHB) may be due for a major correction based on the high volume selling that occurred on December 9 and 10 and the subsequent low volume rally in the subsequent weeks. After following the sector’s performance over the past few days, it now appears even more likely that we will see a major price correction that we can take advantage of by selling short the sector. Specifically, the index was unable to set a new high after bouncing off its 50-day average and has now formed the right shoulder of a head and shoulders pattern on its daily chart. If the bearish head and shoulders pattern follows through to the downside, we could be looking at a large drop in many leading stocks. Take a look at the daily chart of the index (we have removed the moving averages so you can more easily see the head and shoulders pattern):

The first downside target for this index would be a retest of the neckline support around the 550 level. However, if that level is broken, the next target would be the 500 area, which is equal to the distance from the top of the head down to the neckline, as measured from a break of the neckline. There is not yet an ETF for this sector, but you may wish to create your own synthetic ETF by trading a small basket of three or four of the leading stocks within the sector. Individual home builder stocks to consider are: RYL, LEN, BZH, KBH, CTX, PHM, TOL, and DHI. When choosing which stocks you may wish to short, consider those that have already broken below a key moving average, such as their 20 or 50-day MA. Those are the stocks that will have the most overhead resistance in the event of a rally attempt.

The broad market as a whole has certainly been strong lately and have demonstrated resiliency that has surprised many people. Regardless of any fundamental or technical reasons why the stock market “should be” due for a correction right now, the bottom line is that the major indices have continued going higher over the past several weeks and will continue doing so as long as net buyers outnumber sellers. The reason does not matter, nor does it matter if you or I agree. “Overbought” markets can remain that way for a long time and merely being “overbought” should never be the sole reason for initiating short positions. However, that being said, we recommend extreme caution entering any new long positions at current prices.

As prices have been rising, total market volume has been declining over the past two weeks. This, of course, was due to the holiday period, and it means that most of the buying was probably attributed to retail investors, not institutions or professionals. Since institutional money controls approximately 80% of the stock market, it has the power to move the markets much more than retail buying of the general public. Therefore, you need to be aware of the possibility that institutional traders may return from the holidays in profit-taking mode and sell into the retail-driven gains of the past two weeks. Of course, it’s just as possible that institutions will return and join the party in buying mode as well. The point is simply that the low volume of the holiday period may not have been accurately portraying the market’s true strength or weakness, which is exactly why we have been cautious against entering new positions in The Wagner Daily over the past two weeks. However, we expect volume to begin returning to the markets on Monday, January 5, so the institutions will soon show their hands. We’ll be prepared either way, whether they want to drive the markets to new highs or sell it off for a correction. But, at least for one more day, we recommend cautious against aggressively entering any new positions.

Today’s watch list:

There are no new “official” trade setups going into today, but we will aggressively re-assess the market after institutional money returns to the market and shows its intentions. We expect this to happen beginning January 5.

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:



We are all cash, but will look to enter new positions beginning on Monday.

Edited by
Deron Wagner,
Founder and President