The Wagner Daily


After beginning the day with a large gap down, the major indices were unable to recover their opening losses and once again closed with losses on higher volume. On an intraday basis, the broad market trended lower throughout most of yesterday, but saw moderate buying interest during the final 90 minutes that helped to reduce the losses. At its worst levels of the day, the Nasdaq Composite Index was down 2.2%, but the small rally into the close enabled the Nasdaq to pare its loss to 1.5%. Unfortunately for the bulls, volume also increased by 21% in the Nasdaq, which means that yesterday was another bearish “distribution day,” which occurs when an index closes lower, but on higher volume than the previous day. “Distribution days” have now become as frequent as the “accumulation days” during the bull market a few months ago. This switch confirms the current intermediate downtrend in the Nasdaq (which we illustrated in yesterday’s newsletter). Both the S&P 500 Index and Dow Jones Industrial Average followed a similar pattern as the Nasdaq yesterday, and both indices closed down approximately 1.2%. Volume in the NYSE was nearly the same as the previous day, which was a somewhat bright spot compared to the large increase in the Nasdaq’s volume. However, declining volume outpaced advancing volume by a margin of 3 to 1, which was quite bearish.

Yesterday’s selloff in the Nasdaq put the index just above support of its 40-week moving average. The 40-week moving average, which loosely converges with a 200-day moving average, is typically a closely-watched support/resistance level on which many institutions base their program trading. As we mentioned yesterday, a 200-day MA is also a big support level for any index, and it is rare that an index or stock will blow through its 200-day MA without first putting in a decent bounce. The Nasdaq Composite closed at 1,909 yesterday, the 40-week MA is at 1,901, and the 200-day MA is at 1,886. Therefore, we feel odds are good that this moving average convergence will cause the Nasdaq to bounce. Not only did the Nasdaq close just above its 40-week MA, but a quick look at a weekly chart will show you that the index has closed lower in 8 out of the last 9 bars (weeks). While this does not guarantee a rally, it does mean that the Nasdaq is beginning to look a bit oversold in the short-term, at least to the point at which shorting is a bit risky here. The weekly chart below illustrates the 40-week MA as support just below yesterday’s closing price:

As you can see, the last time the Nasdaq traded in the vicinity of its 40-week MA was when the current uptrend began in April of 2003. If the Nasdaq does bounce from the current level, notice the resistance at the 2,025 area (convergence of the 200 and 10-week MAs). Will the 40-week MA mark the new “swing low” that will establish a new, more gradual, uptrend line in the Nasdaq? It will be interesting to see how it develops, but note that the S&P and Dow are both still well above their 40-week MAs. Perhaps we begin to see sector rotation out of the Dow and S&P and into the Nasdaq, which would allow the indices to become more in sync with one another.

On a shorter time-frame, it appeared that buying interest during the final 90 minutes of yesterday’s session was a bit stronger in the Nasdaq than in the S&P and Dow. If you compare these indices on an intraday chart, you will notice that the Nasdaq closed relatively higher in its intraday range than the S&P and Dow. When you see this type of divergence, it usually follows through the next day, which leads us to believe we will see relative strength in the Nasdaq today. Given the close vicinity of the 200-day MA, as well as the 40-week MA, odds are good we will see a bounce in the Nasdaq within the next two days.

The predicted longevity of the anticipated bounce in the Nasdaq is questionable. But, at the very least, it should provide us with a low-risk opportunity to begin testing the waters on the long side of the market. If the bounce fails to go anywhere, you can close any long positions with minimal damage and maybe even profits. Then, you can reverse and go short. However, if the Nasdaq’s convergence of its 200-day MA and 40-week MA does what it is “supposed” to do, you will be long at a price that provides you with a very positive risk/reward ratio. As we know, volume will be the closest thing to watch over the next few days. In order for any bounce to be sustained, we need to see a day of higher price action AND on sharply higher volume. Otherwise, it will indicate that institutional buying interest, a key ingredient for rallies, is not yet present.

Today’s watch list:

QQQ – Nasdaq 100 Index Tracking Stock

Trigger = 34.57 (above yesterday’s high)
Target = 36.50 (upper channel of daily downtrend line)

Stop = 33.94 (below yesterday’s low)

Notes = Per the extensive commentary above, we are looking to play a bounce off support of the 40-week and 200-day moving averages in the Nasdaq. You will also notice that the Nasdaq is near support of the lower channel of its downtrend, as annotated in the chart above. In the event of a large opening gap up, remember to use the MTG Opening Gap Rules for a low-risk entry. You may also consider trading ONEQ (Nasdaq Composite Index ETF) as an alternative to QQQ. Note that the position size multiplier is “4x” for QQQ because its average daily range is minimal. You may wish to review the MTG Position Sizing Model for a thorough explanation of this.

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:

    SMH long (from March 22) –
    bought 37.55, sold 36.87, points = (0.68), net P/L = ($212)

Open Positions:



Yesterday’s SMH setup triggered when it rallied 10 cents above the high of the first 20-minutes, which occurred just after 11 am EST. This type of reversal normally sets in motion the trend for the remainder of the day, but the early afternoon selloff caused us to stop out of SMH when it broke 15 cents below the low of the first 20 minutes. Unfortunately, we stopped out only 2 cents above the low of the day before SMH reversed higher into the close. It’s frustrating when this happens, but we played it the proper way and it’s just part of the trading business you have to accept. Put the odds in your favor and realize it is just a numbers game that will enable you to consistently make profits over the long-term.

Edited by
Deron Wagner,
Founder and President