The Wagner Daily


For the fourth consecutive day, the major indices consolidated near the lows of last week’s selloff. In fact, yesterday was rather boring because both the S&P and Nasdaq traded in a very narrow, sideways range. The S&P 500 Index spent the whole day in a tight 5-point range, while the Nasdaq Composite consolidated in a 14-point range. Many sectors turned in a mixed performance, but formerly leading “high flyer” stocks continued to show relative weakness to the broad market. Total market volume decreased by a few percentage points versus the previous day, which is common during narrow range consolidation days. However, breadth was negative with declining volume outpacing advancing volume by a margin of 1.2:1 in the NYSE and 1.4:1 in the Nasdaq. The Nasdaq Composite broke its 5-day losing streak, but only gained 0.1% for the day. Both the S&P 500 Index and Dow Jones Industrial Average gained exactly the same amount.

While the Nasdaq has been weakest of the broad-based indices over the past week, it appears that both the S&P 500 and the Dow Jones are now poised to make a significant move lower. We are basing this analysis primarily on the market’s inability to rally since last Wednesday’s selloff. The S&P and Dow have not yet broken last week’s lows, but the consolidation in the lower third of last week’s range is bearish. The S&P and Dow attempted to rally on Monday, but the rally reversed into the close. The longer this consolidation at the lows continues, the more likely we will see a break to new lows. The daily chart of the S&P 500 below illustrates how weak the recovery attempt has been since the January 28 selloff:

Looking at the chart above, notice how closely the S&P has been riding the 20-day moving average, especially since Monday’s intraday rally attempt failed. If the market was behaving as it was several weeks ago, the S&P would have already bounced sharply off support of the 20-day MA. Instead, it is consolidating at the lows of last week’s selloff. Therefore, if the S&P 500 Index closes more than a few points below its 20-day moving average, AND on high volume, odds are good that the index will at least correct dow to its 50-day MA, which is presently just below 1100. This would likely occur because not only would the pre-January 28 bulls be trapped, but those who bought the pullback in anticipation of a bounce would also be trapped. Based on this analysis, we remain short both SPY and DIA in anticipation of the breakdown. As for key support, watch the January 29 low of 1122, which perfectly converges with the 200-week moving average we have been discussing over the past week. This convergence means that the 1122 area is a key pivot level to watch going into today. A break below that level would likely trigger many sell stop orders.

As for the Dow, a close below 10,417 would be bearish because it would represent a break of last week’s low. Like the S&P, the Dow has been consolidating in the lower third of last week’s selloff. The 20-day MA on the Dow has perfectly acted as resistance since the break below it on January 28. Take a look:

If the Dow breaks below 10,417, look for the 50-day MA to provide the next support at 10,257. There is also support of the 10-week moving average at 10,353. The Nasdaq, which is already well below its 20-day MA, has support of its 50-day MA at 2014. Remember that the 50-day moving averages on each of the major indices also converges with support of their respective primary uptrend lines on the daily charts. We’ll take a closer look at those trendlines when/if the January 28 lows are broken.

As of the time of this writing, there is a large opening gap down in the pre-market futures trading. If this gap remains intact into the open, each of the major indices will open either at or below last week’s lows. Buyers could easily step in and buy the gap down to big support, so caution is in order before getting too aggressive on the short side. However, if the broad market gaps down and fails to recover within the first thirty minutes of trading, odds are good that the market will head to new lows.

Subscribers who have been paying attention to our daily volume analysis of the broad market should not be surprised by the market’s recent weakness. As you may recall, the Nasdaq had four bearish “distribution days” over the past week, which gave us early warning of institutional selling, which usually precedes retail selling. If you are long any positions that have losses of more than a few percent, we strongly urge you to maintain discipline and simply cut the losers. While the market has recovered every other time during the past year, there is not a guarantee it will do the same again. If it does, you can always buy back in to your positions, and probably even at better prices. If, however, the market does not recover this time around, you don’t want to be left holding the bag. If you are short the market, disciplined stop placement is equally as important, although you may be able to give them a little more room. Either way, remember to trade what you see, NOT what you think!

Today’s watch list:

IWM – Russell 2000 Small Cap Index

Trigger = below 114.55
(below the three-day low)
Target = 111.80 (just below support of 50-day MA)

Stop = 115.90 (above yesterday’s high)

Notes = This setup did not trigger yesterday, but we still like the trade setup for today. However, remember to use the MTG Opening Gap Rules in the event of a gap down below the trigger price. This basically states we will wait for a break of the 20-minute low before shorting. 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:


Open Positions:

    SPY short (from Feb. 2) –
    shorted 114.32, stop 114.90, target 110.60, unrealized points = + 0.54, unrealized P/L = + $108

    DIA short (full position, from Jan. 6 and Jan. 9) –
    shorted 105.27 (avg.), new stop 106.60, target 100.50, unrealized points = + 0.12, unrealized P/L = + $24


IWM did not hit our trigger price for entry yesterday, but we remain short SPY and DIA.

Edited by
Deron Wagner,
Founder and President