The Wagner Daily


The bearish volume patterns we have been warning you about for the past several weeks finally had a major effect on the broad market yesterday. An extended pattern of high volume on the down days and light volume on the up days cannot sustain a rally for long, so it was only a matter of time until the price of the broad market sold off to reflect the volume patterns, which is a leading indicator. The S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite each lost approximately 1.5% yesterday on volume that was 13% higher than the previous day in the NYSE (3% in the Nasdaq). This marked the second consecutive “distribution day” in the NYSE and yet another in the Nasdaq. The volume patterns now are as bearish as they were bullish about a year ago. If you’re a bull, yesterday was just plain ugly. However, the positive thing for short-term traders was that yesterday was the third consecutive day of a smooth intraday trend, which enabled us to lock in nice gains on our short positions in DIA, SPY, and RTH. From a pure technical perspective, many bearish signals were generated when the major indices broke key support levels yesterday. We’ll take a quick look at each of the three major indices so you can properly anticipate the next likely areas of support and resistance to assist with your trading operations.

The S&P 500 Index, which had formerly been showing the most relative strength to the other indices, sustained the largest percentage loss of any single day since October 22 of last year. More importantly than yesterday’s percentage loss was that the S&P closed firmly below its 50-day moving average yesterday, meaning that all three of the major indices are now firmly BELOW their 50-day moving averages. Most noteworthy is the fact that the S&P formed its first “lower low” on the daily chart since the primary uptrend began one year ago. While the S&P 500 has had minor price corrections over the past year, none of them have resulted in a “lower low” being set until yesterday. This technically means the index is no longer in an intermediate-term uptrend. The S&P now joins the Nasdaq, which formed its first “lower low” several weeks ago and has set several “lower highs” and “lower lows” since then. The S&P is finally following suit with the weakness in the Nasdaq. The daily chart below illustrates the “lower low” that was formed yesterday, as well as the break of the 50-day MA:

On the chart above, we have also drawn a horizontal line to illustrate how the S&P found support at the low of January 29 yesterday. If the S&P breaks below that level today, there really is not much support anywhere close below. Rather than forming a base, the S&P rallied sharply in December. While this was good at the time, it now means there is not much price support at the current levels because the next base of support is not until the 1,050 area. Resistance on the upside will be found at the 1,135 to 1,140 area. Obviously, extreme caution is warranted on the long side of the market right now, as odds clearly favor being short at least for the next one to two months.

The Dow simply continued to follow through on its weakness since breaking below its 50-day moving average on March 8. Interestingly, the Dow blew through support of its January 13 low, which was at 10,367. This means the DIA short hit our initial price target, although we covered slightly before that. Like the S&P, the Dow has convincingly formed a “lower low” on the daily chart and also does not have much price support until the 9,900 area due to the lack of a base in December. Take a look:

The Nasdaq Composite broke below its January 24 low of 1,991 yesterday, which formed the third “lower low” to follow up with the second “lower high” that was formed last week. The former support area of 2,000 has now become the new resistance level. The daily chart below illustrates both the upper and lower channel of the new downtrend that has formed on the Nasdaq. We have removed the moving averages so you can more easily see the trendlines that have formed:

Hopefully you have been paying attention to our warnings about the bearish volume patterns that began over a month ago. If so, you were probably prepared for this week’s selloff and profited on the short side. If, however, you were caught blindsided on the long side of the market, now is NOT the time to enter new short positions unless your time horizon is more than a week. Given the sharp selling of the major indices over the past several days, odds are good that we may see a bounce to the upside today. Just as indexes don’t go straight up forever without correcting, selloffs don’t go straight down without bouncing along the way. There’s no sense in increasing your risk by chasing the short side of the market if you missed this first move. Instead, consider waiting for a bounce to sell any remaining long positions into strength and reposition yourself on the short side. As always, make sure you are obeying your stops! Trade what you see, not what you think!

Today’s watch list:

There are no new plays for the day, although we anticipate the broad market is likely to bounce a little bit today.

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 (from March 8) –
    shorted 105.65, covered 104.53 (avg.), points = +1.12, net P/L = + $218

    SPY short (re-entry, from March 10) –
    shorted 114.21, covered 113.49, points = + 0.72, net P/L = + $138

    RTH short (from March 10) –
    shorted 93.75, covered 92.92, points = + 0.83, net P/L = + $81

    SPY short (from March 9) –
    shorted 114.85, covered 114.64, points = + 0.21, net P/L = + $36

Open Positions:



We covered SPY and DIA through the use of trailing stops yesterday, but we re-shorted SPY, per intraday e-mail alert, and closed it out a few hours later. We took profits on all open short positions yesterday and are currently flat.

Edited by
Deron Wagner,
Founder and President