The Wagner Daily


The major indices followed up Wednesday’s broad-based selloff with a mixed performance yesterday, after recovering slightly from high-volume selling pressure during the first half of the day. The broad market spent the first four hours in a correction by time that consisted of sideways consolidation near the lows of the previous day. The Nasdaq broke below the previous day’s low within the first 45 minutes, due largely to weakness in the Software and Networking sectors. However, both the S&P 500 Index and Dow Jones Industrial Average showed slight relative strength and held above their respective lows of the previous day until a final wave of selling finally pushed both indices to new lows around 1:30 pm EST. The break to new lows in all the major indices looked pretty bleak, but the selling pressure subsided and buyers stepped in during the final two hours. The late afternoon buyers reversed the losses of both the S&P 500 and Dow Jones, which closed with gains of 0.5% and 0.4% respectively, but the Nasdaq Composite continued to lag behind and closed 0.4% lower. The Russell 2000 Small Cap Index diverged the most because the index closed with a loss of 0.7%, despite a gain of 0.5% in the S&P 500 Index. This weakness in the small caps enabled us to close our short position in IWM (Russell Small Cap Index) with a profit of more than 3 points. We also netted a profit of 1.6 points in the MDY (S&P Mid-Cap Index) short position. The two intraday charts below illustrate yesterday’s clear price divergence between SPY (S&P 500 Index) and IWM (Russell 2000 Small Cap Index):

In the Nasdaq, yesterday’s total market volume came in 13% higher than the previous day, while volume increased by 4% in the NYSE. This means that yesterday was the third consecutive distribution day in the Nasdaq because the index once again closed lower on the day, but on higher volume. While one or two distribution days within the context of a primary uptrend is not a big deal, three or more distribution days in one week, which represent institutional selling, is often enough to cause the market to have an extended, intermediate-term correction. According to our calculations, the last time the Nasdaq had three or more distribution days was over six months ago. Yesterday’s distribution in the Nasdaq was also the highest since June of 2003. Since volume patterns typically precede price, let this be a fair warning to the bulls. On a more positive note, volume also increased in the NYSE, but both the S&P 500 and Dow Jones closed higher on the day, which counteracts the distribution day in the Nasdaq.

The main support/resistance level to focus on over the next couple of days is the 20-day moving averages of the major indices. Despite yesterday’s late afternoon reversal, both the Nasdaq Composite and Dow Jones Industrial Average remain below their 20-day MAs, which were broken on Wednesday. Yesterday’s weakness in the small and mid caps caused both the S&P Mid-Cap and Russell 2000 Small Cap indexes to break below their 20-day MAs as well. However, the one relatively bright spot is the S&P 500 Index, which bounced off support of its 200-week moving average yesterday and closed a few points ABOVE its 20-day MA. Remember the most basic tenet of technical analysis states that prior support becomes the new resistance level once the support is broken. This means that the 20-day moving averages should now provide resistance on the Dow and Nasdaq. The 20-day MA is at 2094 on the Nasdaq Composite and 10538 on the Dow. The S&P 500, however, is the one question mark because it closed 3 points above its 20-day MA, which is at 1131.50. Today’s closing levels will tell us a lot because all eyes will be on whether or not the S&P 500 can maintain its 9-week winning streak by closing above 1141.50. Based on the recent increase in high-volume selling, I personally would be really surprised if it closes above this level, but it’s a good idea to always be prepared for the unexpected when trading the markets.

Time will certainly tell us whether the markets can absorb the distribution of the past several days, or whether we are in the beginning phases of a multi-month correction. There are still too many mixed signals to have a clear picture, but many of the daily charts now look poised to make another leg lower. We will maintain a watchful eye on volume and how well the market leaders hold up and will continue reporting it as we see it. Like we mentioned yesterday, you should strongly consider tightening up your stops on any long positions and view any bounce as a chance to sell into. You can always get back in if the market heads higher, and probably at a better price. Whether this pullback was just a buying opportunity or the start of a meaningful correction, either way is fine with us. We’ll continue doing as we have always done — searching for individual ETF trade setups with positive risk/reward ratios.

Today’s watch list:

SPY – SPYDER (S&P 500 Index Tracking Stock)

Trigger = below 113.25 (below the 20-day MA and Jan. 28 close)
Target = 110.60 (support of the 10-week MA)

Stop = 114.60 (above 40-MA/60 min.)

Notes = We anticipate a failure of the 20-day MA to hold as support, which should cause SPY to break its 9-week winning streak.

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:

    IWM short (from Jan. 21) –
    shorted 118.73, covered 115.30, points = + 3.43, net P/L = + $340

    MDY short (from Jan. 28) –
    shorted 109.32, covered 107.66, points = + 1.66, net P/L = + $163

Open Positions:

    DIA short (full position, from Jan. 6 and Jan. 9) –
    shorted 105.27 (avg.), new stop 106.60, target 100.50, unrealized points = + 0.19, unrealized P/L = + $38


Both MDY and IWM hit our profit targets yesterday, so we trailed a tight stop (per intraday e-mail alert) and covered both positions for a solid profit yesterday. We remain short DIA, which is an intermediate-term trade.

Edited by
Deron Wagner,
Founder and President