The Wagner Daily


As you may recall, the major indices entered yesterday stuck between support of their 20 and 50-day moving averages below and resistance of their primary daily downtrend lines above. This tightening of the range told us to expect a big move in either direction, which is what occurred yesterday. After being unable to recover from the opening gap down, the major indices promptly entered into an intraday downtrend that remained intact throughout the entire day. The S&P and Nasdaq both formed “higher lows” and attempted a rally in the early afternoon, but the selling volume was too heavy and both indices later broke to new intraday lows. The selling was very broad-based, as no sector was left unscathed. Both the S&P 500 Index and Dow Jones Industrial Average lost approximately 1.3%, while the Nasdaq shed 2.1%. Trading volume picked up sharply and increased by over 21% in the NYSE, but only 4% in the Nasdaq. Breadth was very negative, as declining volume outpaced advancing volume by a margin of nearly 7 to 1! This means that yesterday was clearly a bearish “distribution day,” which signifies institutional selling. Interestingly, volume in the NYSE yesterday was higher than on the April 20 selloff and was also one of the highest volume days of the year.

As a professional trader and newsletter commentator, people sometimes mistakenly assume that I understand everything that happens in the markets and have a thorough explanation as well. While I wish this was the reality, it simply isn’t. Although it’s not common, there are times when the market action leaves me scratching my head and wondering what the heck is going on. I’m not afraid to admit that right now is one of those times. Allow me to explain why.

On April 20, each of the major indices sold off sharply and broke support of their 50-day moving averages. This occurred after the S&P 500, Dow Jones Industrials, and Nasdaq Composite had each broken support of their primary uptrend lines in March, then rallied up to resistance of the prior trendline. When the April 20 selloff occurred after each of the indices failed to break above resistance of the prior uptrend line, we expected this to result in follow-through down to the prior lows that were set at the end of March. When you factor in the sharp increase in total market volume that corresponded with the April 20 selloff, odds were even greater that the next move would be lower, down to the prior lows of March. But, instead of falling to the prior lows, the major indices consolidated at the lower end of the range for one day and then suddenly rallied sharply on April 22. The April 22 rally, which occurred on higher volume, erased all of the losses that occurred on April 20 and trapped many traders who expected the market to move lower. For the next three days, the broad market consolidated in the upper third of the range from the April 22 rally. Because this type of lower volume consolidation after a high volume rally usually leads to new high, many traders gave up any notions of the markets heading lower. Then, just as if the April 22 rally never happened in the first place, the major indices sold off sharply yesterday and on even higher volume than the April 20 selloff. Without a doubt, the market’s indecisive action of the past two weeks has equally fooled both the bulls and bears.

Going into today, expect the lows of last week, April 21 to be exact, to act as support on the major indices. We have circled these prior lows on the three charts below:

The April 21 lows for each of the major indices, as illustrated above, are as follows: S&P 500 Index – 1,116, Dow Jones Industrials – 10,250, Nasdaq Composite – 1,973. Because of the close proximity of yesterday’s closing prices to these lows, the morning session is likely to be choppy because the bulls will anticipate a double bottom, while the bears may expect a break to new lows. If the major indices break below these lows after the first thirty minutes of trading, odds are increased that the indices will head lower today. But, if the major indices only gap down to these prior lows and then recover within the first 20 to 30 minutes, we could see sideways to higher action today. Remember, however, there is now a lot of overhead resistance that was created with yesterday’s break of moving average support, as well as the daily downtrend lines.

Given the type of choppy trading action we discussed above, it is difficult to feel confident predicting the direction of the next major move by the broad market. In my humble opinion, it is beginning to look like the major indices may be entering a period of choppy, range-bound trading. If this occurs, the major indices would be in neither an uptrend nor downtrend, but basically trade sideways instead. Unfortunately, range-bound markets are the most challenging type of environment for swing traders such as ourselves because our strategy is based on simply buying ETFs and stocks in uptrends and shorting those in downtrends. One can profit in range-bound markets through buying each pullback to prior support and shorting each bounce into prior price resistance, but it requires an additional level of precision, as well as tighter money management rules.

Naive traders who continue to execute trades in the same manner they were doing several months ago are likely to sustain significant losses in the current environment. Conversely, astute traders will become more selective with their stock and ETF trade ideas. If a setup is not crystal clear or has a negative risk/reward ratio, they will pass it by and patiently wait in cash for the next opportunity to come along. A range-bound or choppy market teaches patience to traders who are sharp enough to see its necessity. We could have easily shorted a few ETFs when the market sold off yesterday, but the selloff happened so quickly and without much of a bounce. This means that entering new short positions yesterday would have been risky, given how much each of the indices had sold off in such a short period of time. Furthermore, it was unclear whether or not buyers would step in as each of the major indices tested support of their 50-day moving averages. So, we made the decision to remain on the sidelines instead. As such, we did not profit from yesterday’s selloff, but we did not take a large degree of risk either. Morpheus Trading Group has had a consistently profitable track record since its inception several years ago, but it has been the result of having patience and not taking large, unwarranted risks. In the long-run, we’ll take this strategy, versus swinging for the fences, every time. For your benefit, we hope you agree.

Today’s watch list:

SMH – Semiconductor HOLDR

Trigger = 10 cents above the high of first 20 minutes
Target = 39.00 (prior high on daily chart)

Stop = 10 cents below low of first 20 minutes

Notes = The Semiconductor Index ($SOX) began to show relative strength yesterday, and is trying to form a double bottom on its daily chart. We therefore feel that buying SMH offers a positive risk/reward ratio at current price levels. However, we will only buy SMH today IF it rallies above its high of the first 20 minutes, which would be likely to set an intraday uptrend in motion. If, on the other hand, SMH never rallies above its high of the first 20 minutes, we will not enter the trade, as it could go much lower. We will send an e-mail alert when/if we buy SMH.

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:


Open Positions:



No new positions were entered yesterday, and we patiently remain flat.

Edited by Deron Wagner,
MTG Founder and