The Wagner Daily


The divergence between the major indices continued yesterday, as the Nasdaq showed signs of life, but the Dow Jones remained stuck in the red. Despite a 2.4% gain in the Biotechnology ($BTK) Index and a 1.5% gain in the Semiconductor ($SOX) index, the Nasdaq Composite Index closed with a relatively small gain of only 0.5% yesterday. While a few leading stocks turned in strong performances yesterday, the most active Nasdaq large-caps were mixed and acted as a drag on the index. The S&P 500 Index was mixed as well and closed with a fractional gain of 0.1%. The Dow Jones Industrial Average continued to lag behind and diverged from the Nasdaq with a loss of 0.2% yesterday.

Volume increased by only 2% over the previous day in both the NYSE and Nasdaq yesterday. Given that the Nasdaq and S&P both closed with gains, it would have been positive if volume had increased more substantially, but volume once again remained below its 50-day average. Therefore, we continue to have a trend of light volume up days, as institutional interest remains quiet. The mixed performance in the indices yesterday, as well as the choppy intraday trading action, confirmed the lack of heavy institutional buying.

Looking at Fibonacci retracements on the hourly charts, you will notice that the major indices have still been unable to rally above the pivotal 50% retracement level from the Feb. 19 high down to the Feb. 24 low. The S&P 500 Index tested its 50% retracement yesterday, but was unable to close above it. The Nasdaq Composite has not even broken above its 38.2% Fibonacci retracement. The index has been showing relative strength lately, but keep in mind that it also sold off the hardest earlier in the week. We have annotated the retracement levels of both the Nasdaq Composite and S&P 500 Index on the hourly charts below:

Like we mentioned earlier in the week, the inability of an index to rally above its 50% retracement usually results in a resumption of the prior trend. In this case, that would indicate we are still likely to see new lows in the major indices within the next few days UNLESS any of the major indices close above their 50% retracements from the Feb. 19 high down to the Feb. 24 low. If this occurs, all bets are off for new lows in the short term. But, as long as the indices remain below their 50% retracement levels, our bias remains to the short side. Don’t forget that the Nasdaq recently formed a “lower high” AND a “lower low” on its daily chart for the first time since the primary uptrend began in March 2003. Without a doubt, this indicates a shift in bullish sentiment. However, just as markets don’t go straight up without correcting, they also don’t freefall for long without a bounce or correction by time, which is what I believe we have been seeing over the past several days.

The recent divergence between the Nasdaq and S&P/Dow has resulted in choppy intraday trading conditions. This occurs because one index is trying to go higher, but the other one is simultaneously attempting to go lower. This results in both failed breakouts on the strong index and failed breakdowns in the weak index. This, in turn, has made it difficult to maintain a position in many of the broad-based ETFs for more than a few hours without taking a large amount of risk. Sometimes you get a smooth trend and easily net several points of profit (as we did earlier in the week with IWM), but other times you get a bit chopped up. So, what is the solution? The smartest thing to do is reduce your share size until we begin to see some follow-through in the form of a smooth trending day. I really don’t care whether we get an intraday uptrend or downtrend, just as long as it is a trend day. Otherwise, remaining mostly in cash is wise.

Today’s watch list:

There are no new plays for today, as we remain short both SPY and DIA (noted below). However, you may want to keep an eye on BBH (Biotechnology HOLDR), which may show strength today due to a high volume breakout in DNA yesterday.

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. 26) –
    shorted 115.08, covered 115.91, points = (0.83), net P/L = ($85)

Open Positions:

    DIA short (full position, from Feb. 24 and 26) –
    shorted 105.79 (avg.), stop 106.60, target 104.35, unrealized points = (0.15), unrealized P/L = ($30)

    SPY short (HALF position, from Feb. 24) –
    shorted 114.31, new stop 115.41, target 112.60, unrealized points = (0.63), unrealized P/L = ($63)


We shorted IWM yesterday, due to early relative weakness, but it promptly reversed and stopped us out the same day. The second half of DIA short triggered yesterday, but SPY did not. Therefore, we now have a full position of DIA short, but still only half position of SPY short. Neither position hit its stop price yesterday. In the event of a gap up today, remember to use the MTG Opening Gap Rules to manage the short positions in SPY and DIA. This means we will adjust our stop to over the 20-minute high if they gap up and trade at or above their stops on the open.

Edited by
Deron Wagner,
Founder and President