The Wagner Daily


If you missed yesterday’s intraday trading action and only looked at the closing prices of the major indices, you would not fully understand how bearish yesterday’s price action really was because the intraday losses were much sharper than the closing numbers represent. Spurred by initial excitement from Applied Material’s earnings report, the Nasdaq Composite began the day with nearly a 1% opening gap up yesterday, which enabled the index to briefly trade above resistance of its consolidation from the past several weeks. However, follow-through was nowhere to be found and the Nasdaq was immediately met with selling that caused the index to enter into an intraday downtrend. By 1:30 pm EST, the Nasdaq had “filled the gap” and given back all of its morning gain. At 2:30 pm, a wave of high volume institutional selling hit the Nasdaq and caused the index to break to a new low of the week. By 4:00 pm, the Nasdaq had collapsed below support of its prior “swing low” from February 13 and closed at its dead low of the day. The closing loss in the Nasdaq was 1.5%, but the actual loss from the intraday high down to the low was nearly 2.5%. The Russell 2000 Small Cap Index showed even more weakness and closed 2.6% below its intraday high, which is great for our short position in IWM. The hourly chart of the Nasdaq Composite below illustrates how the index gapped up above multi-week resistance, but sold off and closed at a new multi-week low:

The S&P 500 Index, and especially the Dow Jones Industrial Average, both showed relative strength to the Nasdaq yesterday, which was odd considering we expected the opposite scenario. The S&P 500 Index closed with a loss of 0.4%, while the Dow closed only 0.1% lower. But, just like the Nasdaq, both indices sold off sharply from their intraday highs. The S&P sold off and closed 1.0% off its intraday high, while the Dow closed 0.8% off its high. The S&P 500 Index once again ran into resistance at the 1,160 level, which represents the 50% retracement from the all-time high from March 2000 down to the October 2002 low. We’ve been talking about this 50% retracement level for several weeks, and yesterday was proof once again that the 1,160 level will be very difficult for the S&P to penetrate.

Yesterday’s volume in the NYSE increased by 10% over the previous day, while volume in the Nasdaq increased by 16%. Furthermore, volume in both exchanges came in above their respective 50-day averages, which we have not been seeing on the days in which the market closed higher. Since each of the indices closed with losses, yesterday was another confirmed “distribution day,” which occurs when an index closes lower than the previous day AND on higher volume. For the Nasdaq, this was the second consecutive distribution day and the fifth one within the past five weeks. Conversely, there has only been one “accumulation day” (higher closing price on higher volume) during that same period. This volume pattern in the Nasdaq tells us we are clearly seeing institutional selling. Until this month, we have not had more than three distribution days during a five week period since the primary uptrend began back in March 2003.

For those of you who follow candlestick charting patterns, you will notice that yesterday’s price action caused there to be tons of “bearish engulfing” candlesticks that formed on the daily charts of the major indices, as well as sectors and individual stocks. A “bearish engulfing” candlestick forms when an index or stock gaps open above the previous day’s high, but then sells off and closes below the previous day’s low. This is bearish because it not only traps the bulls who bought the gap, but it also attracts short sellers who see the failed breakout. Generally speaking, this type of candlestick pattern usually leads to lower prices over the next several days and often marks a short-term top. Below is a daily chart of QQQ (Nasdaq 100 Index) that illustrates the “bearish engulfing” candlestick:

Looking at the chart above, you will also notice that QQQ closed just above support of the closely-watched 50-day moving average. Watch how the Nasdaq acts around that level over the next several days. If it blows through the 50-day MA on high volume, without even much of a bounce, it would be quite bearish, especially since a lower high was formed on the daily chart this time. More importantly, watch the low of February 5, which should act as support. Since March of 2003, the Nasdaq has not had a single correction that went below its prior “swing” low, so a break below the February 5 low would be bearish because it would represent a “lower low” which would match the “lower high” of this week. Both the S&P and Dow have been showing relative strength to the Nasdaq, but it is not likely they will go anywhere without the Nasdaq leading the way.

Finally, we noticed there is a good chance the Nasdaq Composite will close this week below support of its 10-week moving average, which has not happened since the last correction in August of 2003. While the Nasdaq has traded below the 10-week MA on an intra-week basis, it has not actually CLOSED below it since the week ending August 8. Furthermore, the 200-week MA has once again acted as resistance on the index. The weekly chart of the Nasdaq Composite below illustrates this:

As always, honor your stops and keep those losses tight on any long positions that may be against you. Chances are good you will be able to buy back into those positions at a better price anyway. The market is always right, regardless of whether it makes sense to you or not. Trade what you see, not what you think!

Today’s watch list:

There are no new plays for today, but we will e-mail an alert when/if we enter anything new. We remain short IWM with an unrealized gain of + 2.22 points.

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:

    DIA short (full position, from Feb. 17 and 18) –
    shorted 107.32 (avg.), covered 107.69 (avg.), points = (0.37) net P/L = ($80)

Open Positions:

    IWM short (from Feb. 18) –
    shorted 117.97, new stop 117.90, unrealized points = + 2.22, unrealized P/L = + $222


Due to the MTG Opening Gap Rules, the SMH long setup did not trigger, which kept us out of trouble since the gap failed. The gap rules also enabled us to stay short the IWM, which never broke above its opening gap after the first 20 minutes. DIA, however, hit its stop.

Edited by
Deron Wagner,
Founder and President