The Wagner Daily


Yesterday was a whippy, erratic session in which the major indices oscillated between weakness and strength that seemed to be caused by a tug-of-war between the bulls and bears. The S&P 500 Index began the day with a small opening gap down, sold off to below the previous day’s low, consolidated at the lows for an hour, reversed and rallied to above the previous day’s high, retraced 75% of the rally, then reversed back up again and rallied to a new closing high. In a word, the S&P’s action yesterday could best be described as Schizophrenic! Below is an intraday chart of SPY (S&P 500 Index) that illustrates yesterday’s indecision:

Although it was quite a struggle, the S&P 500 Index eventually closed 0.2% higher on the day, but the Dow Jones Industrial Average once again showed relative weakness and closed 0.1% lower. Like the previous day, the Nasdaq Composite showed relative strength to the S&P throughout the day and closed with a gain of 1.0%. Based on the Dow’s relative weakness over the past few days, it appears that the primary monthly downtrend line we have been discussing is indeed beginning to act as resistance, which should bode well for our intermediate-term short position in DIA.
Needless to say, yesterday was not exactly ideal for intraday trend traders such as ourselves, so we primarily remained on the sidelines and only made one intraday trade in the Intraday Real-Time Room, which was a profitable short in SPY.

Volume increased 13% over the previous day in the NYSE yesterday and was the highest volume day since June 20, 2003! The Nasdaq’s volume was about the same. If the S&P and Dow both closed with solid gains yesterday, the strong volume increase would have been very bullish. But, the reality is that the S&P 500 barely closed higher and the Dow closed fractionally lower. This tells us we saw quite a bit of churning yesterday that was equivalent to the S&P spinning its wheels, although the Nasdaq performed much better. Historically, a strong volume increase without corresponding gains usually precedes a price correction, but there is often a lag of several days to a week until that occurs. Like the previous day, advancing volume barely outpaced declining volume by a ratio of only 4 to 3 in both the NYSE and the Nasdaq, which further confirms the churning. We pay a lot of attention to the relationship between the market’s volume and price action because volume is the one technical indicator that never lies! While price action only shows what is happening on the surface, volume patterns show what is happening “under the hood.”

Our overall thoughts going into today are basically the same as yesterday. The market is being driven by pure momentum right now and has not even had a pullback of more than 1% within the past three weeks. Can this continue much longer? Of course! Just take a look at the feeding frenzy in the latter half of 1999. However, the stakes for getting long the broad market at current levels, without some type of correction, are much too high for me personally. You, of course, can make your own decision in that regard. Regardless, make sure you continue to trail those stops tightly on any open long positions. When the market finally sees a real correction, it could get ugly because of how much momentum has been building up. But, as long as you have stops in place, you won’t get hurt too badly, even if you buy at the top. As long as the trend continues, it makes sense to go with it, just as long as you are cautious and aware of the risks here.

Today’s watch list:

(There are no new “official” plays today, although you may want to keep an eye on BBH (Biotech HOLDR) on the long side, which broke out yesterday afternoon. As always, we will e-mail you an alert if we enter any new ETF swing trades today.)

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 (from Jan. 5) –
    bought 62.15, sold 61.20, points = (0.95), net P/L = ($98)

Open Positions:

    DIA short (HALF position, from Jan. 6) –
    shorted 105.20, stop 107.55, target 100.50, unrealized points = (0.35), unrealized P/L = ($35)


The IWM short did not trigger yesterday. However, OIH hit our stop yesterday, which unfortunately was the exact low of the day. Sometimes that happens, but it is just part of the business. Not honoring stops religiously is paramount to playing Russian roulette. Besides, we can always get back in OIH if we still like the trade.

Edited by
Deron Wagner,
Founder and President