The Wagner Daily


Like the prior day, last Friday was another day of divergence between the S&P/Dow and the Nasdaq. While the Nasdaq Composite Index closed with a loss of 0.3%, both the S&P 500 and Dow Jones Industrial Average closed with gains of 0.5%. This was similar to the previous day, in which both the S&P and Dow closed with gains of 0.1%, but the Nasdaq closed 1.1% lower. The recent divergence between the major indices indicates we are seeing sector rotation out of the growth-oriented technology sectors and into the “old economy” defensive sectors. This explains why we have suddenly been seeing gains in the Pharmaceutical and Banking indexes, but significant losses in the Semiconductor and Internet indexes. As we discussed in last Friday’s newsletter, you can potentially profit on both sides of the market through buying sector ETFs with relative strength and shorting those with relative weakness. The two charts below illustrate the recent price divergence between QQQ (Nasdaq 100 Index) and SPY (S&P 500 Index):

Looking closely at the charts above, notice how SPY closed last Friday above the highs of the prior two days, and also above both its 20 and 40-period moving averages (on the hourly chart). Conversely, notice how QQQ showed relative weakness to the S&P and closed near its low of the week. QQQ also closed well below both the 20 and 40-MAs, which indicates no sign of an hourly trend reversal at this point. Since we were short QQQ for most of last week, the weakness in the Nasdaq enabled us to close the remainder of our QQQ short position for nearly a 3% gain on Friday.

Total market volume in both the NYSE and Nasdaq declined by 5%, which means the Nasdaq was granted a reprieve from having another “distribution day” of lower closing prices on higher volume. While the decline in volume means the selling intensity slowed a bit on the Nasdaq, it also means there was not much demand to buy stocks in the NYSE. Institutions continue to remain largely on the sidelines, as evidenced by the broad market’s inability to close higher AND on higher volume over the past several months. As long as volume remains light on the up days, and often heavier on the down days, the broad market is likely to remain in a sideways to lower trend.

Looking at the daily charts, both the S&P 500 Index and Dow Jones Industrial average closed last week back above their 50-day moving averages, but only by a few points. Given that last Friday was options expiration day, we would not lend much credence to the close above the 50-day MAs. More importantly, the Nasdaq Composite could barely get out of its own way the past two days and closed the week below both its 50 AND 20-day moving averages. The Nasdaq also closed below support of its 200-week moving average, after popping above it for only 2 of the past 12 weeks.

Going into today, keep an eye on the S&P and Dow Jones in order to determine whether they continue to show relative strength to the Nasdaq. If they do, we may see the indices hold above and form a new base at their 50-day moving averages. However, the S&P was unable to rally beyond its 50% Fibonacci retracement of last week’s selloff. This means we are likely to continue seeing resistance near Friday’s closing prices. On the Nasdaq, the 2,000 level is an important level to watch, both due to its “psychological” importance with retail investors AND because the 20-day moving average has converged at the same price. If the Nasdaq rallies above the 2,000 level, resistance of the 50-day MA is at the 2,014 level. Keep in mind that all the weekly charts continue to show a “lower high” being put into place, which has shifted our overall bias over the past month. Unless we suddenly see a sharp volume increase on a day of broad-based gains, our bias remains cautiously bearish, especially due to the weakness in the Nasdaq. Remember also that we are in the middle of earnings season and, thus far, price reactions to the reports have been mostly bearish.

Today’s watch list:

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

Trigger = below 113.36 (below 50-day MA)
Target = 111.40 (61.8% retracement of the last rally)

Stop = 114.30 (above the 61.8% retracement)

Notes = Looking to short a failed breakout in the S&P if it breaks back below its 50-day MA

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:

    QQQ short (HALF position, from April 6) –
    shorted 37.10, covered 36.08, points = + 1.02, net P/L = + $198

    IWM short (from April 15) –
    shorted 115.83, covered 115.42, points = + 0.41, net P/L = + $39

    DIA short (from April 14) –
    shorted 103.95, covered 104.73, points = (0.78), net P/L = ($162)

Open Positions:

    DIA short (re-entry, from April 16) –
    shorted 104.46, stop 105.10, target 102.25, unrealized points = (0.20), unrealized P/L = ($40)


We locked in gains on both QQQ and IWM shorts when they hit our trailing stops on Friday, which were updated via intraday e-mail alert. Ironically, Friday’s high in DIA was exactly equal to our stop, to the penny! We still like the DIA short, so we re-entered the trade in the afternoon and adjusted our stop as per above.

Edited by Deron Wagner,
MTG Founder and