The Wagner Daily


If you only looked at yesterday’s nearly flat closing prices of the major indices and did not observe the intraday price action, it may have seemed like a quiet, non-volatile day. But the reality is that yesterday’s broad-market price action was quite a roller coaster ride that undoubtedly was challenging for both the intraday bulls and bears! The day began with a small opening gap up in the major indices, but promptly reversed upon the release of worse than expected economic news at 10 am EST. The broad market trended lower for the next hour, but held above support of the previous day’s lows. Buyers stepped in around 11 am EST, causing the major indices to rally sharply and break out to new intraday highs. After the buying subsided around 1 pm EST, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each spent the next two hours consolidating at their highs. This type of consolidation at the intraday highs is usually bullish and often leads to new highs later in the afternoon. However, the buyers were not able to absorb the overhead price resistance from last week’s selloff, and the bears took control during the final hour, causing the broad market to reverse once again. When the dust finally settled, each of the major indices had closed near the flat line. The S&P 500 Index showed slight relative strength and closed 0.4% higher, but the Nasdaq Composite Index closed 0.15% lower. Although the loss was small, yesterday was the FIFTH CONSECUTIVE DAY of losses in the Nasdaq Composite. As we mentioned yesterday, the last time the Nasdaq had four or more consecutive losing days was six months ago. The blue-chip Dow Jones Industrial Average closed only 11 points (0.1%) higher, but the range of its price action from yesterday’s intraday low to the high was 134 points, which equates to 1.3% of its current value. This gives you a good idea as to the volatile and indecisive nature of yesterday’s trading session.

Total market volume began the day at a pace much lower than the previous day, but accelerated both during the late morning rally and late afternoon selloff. Volume in the NYSE ended the day about 3% lower than the previous day, while volume in the Nasdaq came in fractionally higher than the previous day. This means that yesterday was technically another “distribution day” in the Nasdaq, but the increase in yesterday’s volume was very minor, so it was not really confirmed. Nevertheless, including yesterday, the Nasdaq has had FOUR distribution days, as represented by lower closing prices on higher volume, within the past six trading sessions. This is a sign that the correction we are seeing is more than just retail “profit taking.” While it’s still too early to know the extent of the correction, the volume figures are telling us that institutions are continuing to sell into strength. Remember that volume usually precedes price and is the one technical indicator that never lies. Volume speaks volumes!

In yesterday’s Wagner Daily, we discussed how indexes either correct by time or price after a major move, such as the selloff we saw last week. Prior to yesterday, the major indices were only correcting by time because they consolidated near the lows of the range, rather than bouncing. However, due to yesterday’s intraday rally, each of the major indices has also corrected by price. When predicting how high an index will bounce after it has sold off, we always mention the reliability of using Fibonacci as a technical indicator (click here to read a brief article on using Fibonacci). If you apply Fibonacci to yesterday’s rallies in the major indices, you will see that the bounces perfectly equated to key Fibonacci retracement levels. We have annotated this for you on hourly charts of the major indices below. Moving averages have been removed from the charts in order for you to more easily focus on the Fibonacci retracement levels.

The Nasdaq Composite was the weakest of the major indices because it only rallied up to resistance of its 38.2% Fibonacci retracement before reversing back down to the intraday low. Take a look:

The Dow Jones Industrial Average bounced slightly more, right up to its 50% retracement level, before heading back down. Here’s an hourly chart of the Dow:

The S&P 500 showed the most relative strength yesterday. Not only did it rally to the 61.8% retracement level, but it also held above the morning lows when it sold off into the close. The Nasdaq, conversely, tested support of its morning lows when it sold off in the late afternoon. The hourly chart below illustrates the retracement of the S&P yesterday:

As you can see from the charts above, Fibonacci works great for predicting the extent of a market correction. In fact, it’s quite uncanny how well it works most of the time! In the case of yesterday, measuring the Fibonacci retracements would have provided you with a low-risk entry point for shorting the market or selling any remaining long positions into strength. Since none of the major indices were able to rally and close beyond their 61.8% retracement levels, we must assume the recent downtrend will continue, at least in the short-term. The increasing quantity of failed breakouts in leading stocks and high flyers reinforces this analysis.

Once again, continue watching the key support and resistance levels we discussed yesterday. Specifically, keep an eye on the 20-day moving averages of the major indices, as well as the 200-week moving averages for both the S&P 500 and Nasdaq Composite. If the indices break below the lows of the past week, expect a sharp selloff because the bulls who were buying the pullback in anticipation of a rally will be trapped, as will those who bought at the highs of two weeks ago. We remain well-positioned with shorts in both DIA (Dow Jones Indu. Avg.) and SPY (S&P 500 Index). SPY hit our stop by only a few pennies yesterday afternoon, but we re-entered when the market rolled over in the afternoon (per intraday e-mail alert).

Today’s watch list:

IWM – Russell 2000 Small Cap Index

Trigger = below 114.55
(below the two-day low)
Target = 111.90 (support of 50-day MA)

Stop = 115.80 (above yesterday’s close)

Notes = The Small Cap Index has been showing relative weakness and is unable to get back above its 20-day MA. We feel the next move is lower, down to the 50-day MA, based on its inability to sustain a rally after last week’s initial selloff.

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:

    SPY short (from Jan. 30) –
    shorted 113.26, covered 114.61, points = (1.35), net P/L = ($276)

Open Positions:

    SPY short (from Feb. 2) –
    shorted 114.32, stop 114.90, target 110.60, unrealized points = + 0.35, unrealized P/L = + $70

    DIA short (full position, from Jan. 6 and Jan. 9) –
    shorted 105.27 (avg.), new stop 106.60, target 100.50, unrealized points = (0.03), unrealized P/L = ($6)


SPY hit our stop by only a nickel before selling off sharply yesterday into the close. However, as per intraday e-mail alert, we re-shorted SPY when it broke below 114.30.

Edited by
Deron Wagner,
Founder and President