The Wagner Daily


After several days of narrow-range consolidation at their 50-day moving averages, both the S&P 500 and Dow Jones Industrials gapped up above resistance yesterday morning and initially looked promising, but the breakout promptly failed and eventually triggered a major reversal that resulted in substantial losses in the broad market. Each of the major indices held above their breakout points for the first 90 minutes of trading yesterday, but rolled over to new intraday lows during the mid-day doldrums. After chopping around in a narrow range for several hours during the mid-day session, several institutional sell programs hit the market beginning at the 2:30 pm EST reversal period. The selling fed on itself and subsequently turned into mild panic selling during the final hour of the day. During the final 90 minutes of trading, the S&P 500 Index dropped a whopping 18 points (1.6%), the Dow Jones Industrials fell 146 points (1.4%), and the Nasdaq Composite shed 42 points (2.0%). This resulted in closing losses of 1.2% for the Dow Jones, 1.6% for the S&P 500, and 2.1% for the Nasdaq Composite. The opening gap up and morning rally attempt stopped us out of our SPY and DIA short positions, but, per intraday e-mail alert to subscribers, we re-shorted both positions when they broke to new intraday lows at mid-day. We held both SPY and DIA short throughout the end-of-day selloff and, going into today, we now have an unrealized gain of more than 1.5 points in both short positions.

Volume in the NYSE increased by 25% yesterday, while volume in the Nasdaq was 14% higher than the previous day. Since it was clearly a day of broad-based losses, this means yesterday was another bearish “distribution day” in the broad market, the third such day for the Nasdaq within the past six sessions. If you recall our commentary in yesterday’s Wagner Daily, we referenced the fact that the price to volume patterns of the broad market have been bearish lately. Nearly every rally attempt over the past several weeks has occurred on lighter volume, while the down days have been occurring on the same to heavier volume. Specifically, we mentioned that Monday’s gains in the Nasdaq occurred on lighter volume and we therefore questioned the stability of that day’s rally. Yesterday’s bearish reversal was a clear example of why you cannot trust light volume rallies; it only took one wave of selling to not only undo all the gains that occurred on light volume, but to generate losses as well. While the average retail investor pays attention only to chart patterns, a careful, daily analysis of price to volume relationships in the market enables you to understand what is really happening beneath the surface, or “under the hood.”

When the selloff began late yesterday afternoon, we mentioned in the Intraday Real-Time Room that the S&P, Dow Jones, and Nasdaq were each likely to sell off down to support of their prior lows from April 15. However, we expected that to occur over a matter of the next few days. Instead, the major indices not only sold off down to those levels during yesterday’s session, but they actually broke BELOW last week’s lows. Looking at the daily charts, each of the major indices formed “bearish engulfing” candlestick patterns yesterday, which occurs when an index opens above the prior day’s high, but closes below the prior day’s low. The break of last week’s lows means the major indices are probably headed down to test support of their prior lows from last month.

Below are daily charts of SPY (S&P 500 Index), DIA (Dow Jones Industrial Average), and QQQ (Nasdaq 100 Index). On each chart, notice how the ETF closed yesterday below the red horizontal line, which marks last week’s lows. Last week’s lows were prior support, but will now act as resistance since the support was broken. Therefore, we suggest you make a note of this price level on each chart so that you are aware of the key resistance of last week’s low. We have also circled the next key support levels for the indices, which is the prior lows from March. If you are short, this is where you could expect the indices to find their next major price support. Take a look:

Although it goes without saying, this is NOT the time to be stubborn with any long positions that have gone against you. When the market makes a sharp and sudden reversal, as it did yesterday, this often feeds on itself and leads to further moves in the direction of the trend (which is now down). Therefore, it is crucial that you obey your stops and do not get into “hope” mode because that is a very dangerous game to play. Hopefully, you have been following our commentary and are actually short the markets. If so, you are probably quite happy right now. But if not, please heed our advice and protect your capital on the long side. Again, we view any bounce in the markets as a chance to sell your long positions into strength.

Today’s watch list:

IWM – Russell 2000 Small Cap Index Tracking Stock

Trigger = below 114.17 (below yesterday’s low)
Target = 110.80 (support of prior low from March 24)

Stop = 115.90 (above the 38.2% retracement)

Notes = Looking to short a breakdown with target of prior lows of March

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 April 16) –
    shorted 104.46, covered 104.87, points = (0.41), net P/L = ($88)

    SPY short (from April 16) –
    shorted 113.37, covered 114.21, points = (0.84), net P/L = ($174)

Open Positions:

    SPY short (re-entry, from April 20) –
    shorted 113.85, new stop 113.80, target 111.40, unrealized points = + 1.93, unrealized P/L = + $386

    DIA short (re-entry, from April 20) –
    shorted 104.57, new stop 104.55, target 102.20, unrealized points = + 1.54, unrealized P/L = + $308


Our original positions in DIA and SPY were stopped out by a few cents yesterday morning, but, per intraday e-mail alert, we re-shorted both SPY and DIA when they broke to new intraday lows. We now have a very solid unrealized profit in both positions, which are nearing their price targets on the short side. Note that we will take profits on only HALF of the share size when SPY and DIA hit their price targets, but will continue trailing a stop lower on the remaining half of the position size. We have also lowered both stops to breakeven.

Edited by Deron Wagner,
MTG Founder and