The Wagner Daily


The divergence between the major indices continued once again, as the S&P 500 Index and Dow Jones Industrial Average both closed with only minor losses of 0.3% and 0.1% respectively, but the Nasdaq showed relative weakness and closed with a much greater loss of 1.5%. Total market volume was 5% lighter in the NYSE, but increased by a few percent in the Nasdaq. The lower closing price on higher volume caused yesterday to become another bearish “distribution day” in the Nasdaq, the sixth such “distribution day” within the past 30 days. Negative volume breadth confirmed the institutional distribution, as declining volume outpaced advancing volume by a wide margin of 4.4 to 1 in the Nasdaq and 2.3 to 1 in the NYSE. If you have been paying attention to our analysis of the Nasdaq’s numerous “distribution days” over the past month, yesterday’s break of support in the Nasdaq should not have come as a surprise to you. The recent pattern of bearish “distribution days” and lack of “accumulation days” over the past month provided insight as to what the “smart money” was doing and pointed to a likely correction, which we are beginning to see now. Remember that volume is the one technical indicator that never lies and is always a leading indicator of price action.

As the negative breadth numbers confirmed, yesterday’s selling was broad-based throughout most sectors, and most of the former high-flying stocks also turned in substantial losses. Both the Internet HOLDR (HHH) and Semiconductor HOLDR (SMH) each lost about 3% yesterday, which certainly was a major drag on the Nasdaq. Other tech sectors such as Hardware and Software also turned in significant losses. The Biotechs held up much better than the tech stocks, but was not enough to prevent the losses in the tech-heavy Nasdaq. Out of all the sector ETFs we follow on a daily basis, only Utilities (UTH) and Banking/Financial (XLF) closed positive on the day.

The Nasdaq Composite closed at its lowest point of the calendar year yesterday and remains only fractionally positive from the December 31 close. The Nasdaq closed the year 2003 at a price of 2003 (which is ironic and easy to remember), but closed yesterday at 2007. Yesterday’s intraday low in the Nasdaq was 1999, but minor buying into the close pushed the Nasdaq (barely) above negative territory for the year. From a technical point of view, yesterday’s action in the Nasdaq was quite bearish because the index broke below its prior low from February 5. This means that, for the first time since the primary uptrend began in March of 2003, the Nasdaq has formed a “lower low” and “lower high” on its daily chart. We have annotated this on the chart below:

When an index that has been in an extended uptrend suddenly forms a “lower high” and a subsequent “lower low,” as the Nasdaq has done, it usually marks the beginning of an intermediate-term correction. This often results in a new, less-steep uptrend being formed, although it could also lead to a resumption of the primary downtrend that began with the year 2000 highs. If you look at a daily chart of the Nasdaq going back to March of 2003, you will see that yesterday was the very first time in which a “lower low” occurred within the context primary daily uptrend. Furthermore, the 50-day moving average has been firmly broken and will now act as overheard resistance on the Nasdaq. On the bright side, the 2,000 level, which acted as resistance in November and December of last year, should now become a support level. If, however, the Nasdaq blows through the 2,000 level, the severity of the correction could easily intensify.

We’ve been focusing more on the Nasdaq than the S&P and Dow over the past several weeks simply because the Nasdaq has been so much weaker. However, we now anticipate the start of sector rotation out of the S&P and Dow-related sectors and back into the beaten-down Nasdaq. This does not mean that the Nasdaq will necessarily become strong, but more likely means we will begin to see weakness in the Remember that institutional money is always at work and needs to be parked somewhere. Therefore, when one index becomes significantly out of sync with another index, you will often see money flow in such a manner that brings the major indices back in sync with each other. In this case, we expect to see forthcoming weakness in both the Dow Jones and S&P 500, as both indices need to “catch up” to the weakness in the Nasdaq.

Based on our expectation of money flow out of the S&P and Dow, odds probably favor shorting the broad-based ETFs such as SPY (S&P 500 Index) or DIA (Dow Jones Industrial Average) instead of QQQ (Nasdaq 100 Index) or IWM (Russell 2000 Small Cap Index), both of which have already corrected significantly. For this reason, we covered our short position in IWM yesterday for nearly a 4-point profit. We also took profits on our DIA short because it was showing relative strength yesterday, but we are fully prepared to re-short DIA on any confirmation of weakness over the next few days. The daily charts of both the S&P and Dow appear to be hanging on by a thread, as a break below their 20-day moving averages is likely to result in a rapid move down to their 50-day moving averages. We have illustrated the point at which we would short SPY and/or DIA on the charts below:

Obviously, it’s much too early to even speculate on the extent of this broad market correction, but one thing is for certain — the overall sentiment of the market has definitely changed. Do not ignore this fact by clinging to any losing positions. Capital preservation needs to be your primary goal when market conditions suddenly change. Otherwise, you could easily give back your hard-earned profits. Trade what you see, not what you think!

Today’s watch list:

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

Trigger = below 114.15
(below yesterday’s low)
Target = 112.60 (support of the 50-day moving average)

Stop = 114.95 (above yesterday’s close)

Notes = See commentary above for chart and detailed explanation of this trade setup. Since the futures are gapping down in the pre-market, remember to use the MTG Opening Gap Rules, which basically state we will wait for a break of the 20-minute low before shorting IF it gaps down to open below its trigger price.

DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)


Trigger = below 105.80
(below yesterday’s consolidation)
Target = 104.35 (support of the prior low from January)

Stop = 106.51 (above yesterday’s close)

Notes = See commentary above for chart and detailed explanation of this trade setup. Since the futures are gapping down in the pre-market, remember to use the MTG Opening Gap Rules, which basically state we will wait for a break of the 20-minute low before shorting IF it gaps down to open below its trigger price.

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 Feb. 18) –
    shorted 117.97, covered 114.21, points = + 3.76, net P/L = + $373

    DIA short (from Feb. 20) –
    shorted 106.79, covered 106.13, points = + 0.66 net P/L = + $126

Open Positions:



We covered IWM for a nice profit yesterday because it hit our original profit target of the 50-day MA. We also took profits on the DIA short because it continued to show relative strength to the other indices, although we plan to re-short DIA today if it convincingly breaks below its 20-day MA.

Edited by
Deron Wagner,
Founder and President