The Wagner Daily


The major indices sold off sharply yesterday, on much higher volume, and broke below many key technical levels. The broad market began the day with an opening gap above the previous day’s highs, but traders immediately sold into strength and caused the gap to be filled within the first 20 minutes of trading. The reversal set the bearish tone for the remainder of the day, and each of the major indices settled into a steady intraday downtrend. Of the major indices, the biggest loss was in the Russell 2000 Small Cap Index, which lost 2.5%. This worked out great for our short position in IWM, which is the ETF for the Russell Small Cap Index. The Nasdaq Composite sustained a loss of 1.7%, the S&P 500 lost 1.4%, and the Dow Jones dropped 1.3%. Like last Thursday, yesterday’s opening gap higher and subsequent sell off below the previous day’s lows caused many “bearish engulfing” candlesticks to be formed on the daily charts. It also caused the S&P 500 and Dow Jones to close below their 50-day moving averages. But, more disturbing than the failed gap up and subsequent selloff was yesterday’s sharp increase in volume.

Total market volume in both the NYSE and Nasdaq increased by approximately 29% over the previous day’s levels. Since the major indices all closed with substantial losses, this means yesterday was a confirmed “distribution day,” which occurs when an index closes lower on the day AND on higher volume. Without a doubt, institutions were behind the selling yesterday, which is important because institutional money controls over 70% of the market and has much more power to move the markets than the retail public. Volume in both the NYSE and Nasdaq spiked back above its 50-day average levels, but that is bearish since it occurred on a down day.

Although it probably disappointed the bulls, yesterday’s downtrend was great for trend traders such as ourselves because the range was wide and each of the indices trended smoothly lower without any erratic or indecisive intraday gyrations. This enabled traders to establish short positions in the beginning of the day and simply ride the profits all the way down, since the major indices all closed near their intraday lows. While the S&P 500 Index traded in a measly 4-point range the previous day, the distance from yesterday’s high down to the low (the “trading range”) was more than 20 points! The Dow Jones Industrial Average also experienced a range expansion and traded in a range of 190 points. If you’re on the right side of the market, those are the kind of days that can net you a great profit. While we’re not always on the right side of the market, we certainly were yesterday and our open positions in both IWM and QQQ short worked out well. IWM hit our profit target of 116.20, so we closed out half of the position for a 3-point gain and switched to a tight trailing stop on the remaining half position. We are still short a full position of QQQ because we believe it is headed lower, but we now have a solid unrealized gain in that position as well. Below is an intraday chart of DIA (Dow Jones Industrial Average) that illustrates yesterday’s wide range and the smoothness of the intraday trend once the gap failed to hold:

If you have been paying close attention to our analysis over the past several days, especially the broad market’s recent price to volume relationship, yesterday’s weakness should not have come as a surprise to you. After becoming stuck in a light volume trading range for several days, the major indices gapped up last Thursday, but immediately sold off and eventually closed the day below the previous day’s low. This caused many “bearish engulfing” candlesticks to be formed on the daily charts. On the next day of trading (Monday), the broad market rallied slightly and closed with gains, but the major indices were not able to close above their respective highs of the previous day. More importantly, the rally day occurred on total market volume that was lighter than the previous day’s selloff and was also the lightest volume day of the year. As mentioned in yesterday’s morning newsletter, we never trust a light volume rally, especially one that occurs after the type of bearish price action we saw the previous day. This served as a warning sign that the market was likely to see selling pressure going into yesterday, although the extent of the losses was difficult to predict.

Have you noticed any new patterns that have emerged over the past week? One thing that grabbed our attention was the market’s new trend of gapping up above the previous day’s high, but immediately selling off and closing at or below the previous day’s lows. This has occurred in two of the past three days and has been the cause of the “bearish engulfing” candlesticks we have been discussing. When in a bull market, the major indices will often gap down sharply, but immediately rally and close near the intraday highs. This occurs because institutions use pullbacks and corrections as an opportunity to buy stocks at better prices. Conversely, the opposite pattern often happens during bear markets, which occurs because institutions use the opening gap ups as a chance to sell into strength and minimize the losses on their long positions, as well as establish new short positions. Therefore, when we begin to see a pattern of numerous failed gap ups, it is yet another warning sign that the markets are probably headed lower.

As for individual sectors, just about everything got slammed yesterday. The worst losses were in the interest rate sensitive financial sectors such as Brokers ($XBD), Banks ($BKX), and Utilities ($DJU). The Home Builders ($DJUSHB) also continued to get whacked, which is actually healthy for that sector, given the runaway gains over the past two years. The Internet sector ($GIN), which gapped up and broke out to a new 52-week high only two days prior, sold off sharply yesterday and nearly filled the gap. Even the Gold and Silver Miners ($XAU), which was been showing relative strength over the past several months, sustained its biggest single day loss in many months. While sector rotation usually enables us to find one or two places to hide, there simply were not any yesterday.

The broad-based selling in nearly every sector, along with the sharp increase in total market volume, tells us that yesterday’s selloff was for real. As such, please be sure to honor your stops on any long positions and don’t shift into “hope” mode. If retail panic begins to set in, the losses can always be much worse than you think. Fortunately, we are on the short side of the market right now and see no good reason to be long at this time. The weekly charts are beginning to show bearish patterns, and that is more important than any intraday movements. If you are not already short, we would advise caution aggressively entering short positions without first seeing some type of correction to yesterday’s selloff. Ideally, it would be good to see either a correction by time, in which the indices trade sideways today, or some type of bounce. We would view either of these scenarios to be bearish and feel they would offer a relatively low risk entry point to establish new short positions.

Today’s watch list:

We are looking to enter new short positions, but do not want to do so unless we see some type of minor correction first. Therefore, we are not listing any specific trade setups here, but will be watching for the right entry point intraday. As always, we will send you an intraday e-mail alert if/when we enter any new short positions. DIA short is on our watchlist, as is MDY and SPY short.

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 (HALF position, from April 6) –
    shorted 119.53, covered 116.55, points = + 2.98, net P/L = + $148

    OIH long (from April 12) –
    bought 70.05, sold 71.04 (avg.), points = + 0.99, net P/L = + $96

Open Positions:

    IWM short (HALF position, from April 6) –
    shorted 119.53, new stop is 10 cents over the high of the first 20 minutes, target reached, unrealized points = + 2.89, unrealized P/L = + $144

    QQQ short (from April 6) –
    shorted 37.10, new stop on half the position is 5 cents over the high of the first 20 minutes and 37.05 on the second half of the position, target 36.10, unrealized points = + 0.47, unrealized P/L = + $188


Per intraday e-mail alert, we sold OIH into strength yesterday morning and also took a 3-point profit on half of the IWM short position when it hit our target of 116.20. We now remain short a full position of QQQ and half position of IWM. Note the new, tighter stop prices listed above. Using two separate stop prices for QQQ, one for each half of the position.

Edited by Deron Wagner,
MTG Founder and