The Wagner Daily


The broad market received no reprieve on Friday, as the Nasdaq Composite sustained its fourth consecutive day of losses, while both the S&P 500 and Dow Jones Industrial Average closed lower for the third consecutive day. The Nasdaq Composite dropped 2.0% on Friday, which means the index lost 6.3% for the week. On a percentage basis, it was the worst losing week for the Nasdaq since April 2002, when the index dropped nearly 7.5%. The S&P 500 and Dow Jones Industrial Average both fared better on Friday and lost 0.6% and 0.5% respectively. For the week, both the S&P and Dow lost more than 2.0%.

Total market volume declined in both the NYSE and Nasdaq on Friday, which was refreshing given the two consecutive “distribution days” on Wednesday and Thursday, in which the major indices closed with losses AND on higher volume. Nevertheless, volume on both exchanges was still well above its 50-day average. The Nasdaq has suffered five distribution days within the past several weeks, which has been selling pressure to prevent the Nasdaq from holding onto its gains from any rally attempts. Breadth has been negative just about every day, which also confirms that institutions are selling stocks in nearly every sector.

When we list the short-term support and resistance levels of the major indices for you, we hope you are using the information to support your own trading decisions. If you do, chances are good that you will realize a higher level of accuracy in your individual stock and ETF plays because of our focus on the support and resistance levels of the broad market. In last Friday’s Wagner Daily, for example, we mentioned that the S&P 500 was likely to run into resistance from its prior lows of April 21, because prior support becomes the new resistance once that support is broken. We expected the S&P 500 to find resistance around the 1118 level on Friday, which is exactly what happened. The hourly chart of the S&P 500 Index below illustrates how the prior support of the April 21 low became the new resistance level:

With last week’s break of the April 21 lows, it is becoming pretty clear that the major indices are headed down to test support of their prior lows from March. The Nasdaq Composite closed at 1920 on Friday, which is only 24 points above its prior low from March 24. More importantly, the Nasdaq closed BELOW its 200-day moving average, which is at 1933. It was the first time since the former uptrend began in March 2003 that the Nasdaq has closed below its 200-day moving average. Many institutions follow the 50-day moving average as an indicator to make intermediate-term buying or selling decisions, but the 200-day moving average is even more important because it represents the long-term trend of an index. Any index trading below its 200-day moving average is no longer considered to be in a long-term uptrend. While the close below the 200-day moving average was certainly bearish, we cannot yet officially declare a confirmed break because an index will often probe just below the 200-day MA, but bounce back above it a day or two later. It is extremely rare that an index or stock will fall apart through its 200-day MA on its first test of support, without first attempting to bounce. It’s entirely possible that the Nasdaq will soon break and remain below its 200-day MA, but it is simply to early to make such a determination at this point. Below is a daily chart of the Nasdaq Composite that illustrates Friday’s close below the 200-day MA. Also note the proximity to the prior lows from March:

As of the time of this writing, there is a pre-market gap up in both the S&P and Nasdaq futures. Given the severity of the Nasdaq’s selling over the past four days, as well as its proximity to the 200-day MA, odds are good that the broad market closes higher today. If the pre-market gap holds, look for the indices to find support at Friday’s lows, which was 1107 for the S&P 500, 10225 for the Dow, and 1920 for the Nasdaq. The market action of the past week has caused us to shift our intermediate-term bias to “bearish,” but that does not mean the market will not bounce along the way. One low risk play today would be to buy QQQ (Nasdaq 100 Index) on any pullback today, then place your stop below Friday’s low. Although the Nasdaq may not rally far, this play would provide you with a positive risk/reward ratio due to a small stop loss point with larger upside potential. As for shorting, I would probably NOT be looking to enter any new short positions today, as you are probably late to the party now. Instead, consider playing any quick bounces on the long side and, more importantly, use any significant bounces over the next few days as a chance to establish or re-establish new short positions in the major indices.

Today’s watch list:

Keep an eye on SMH, which is the ETF that tracks the Semiconductor Index. We are not listing it as an “official” play because we think the bounce will be too short-lived. However, short-term traders may consider buying SMH today and keeping a tight stop just below the 20-minute low or Friday’s low. Then, trail a stop to lock in gains along the way.

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:

    OIH short (HALF position, from April 30) –
    shorted 70.41, covered 68.87, points = + 1.54, net P/L = + $76

Open Positions:

    OIH short (HALF position, from April 30) –
    shorted 70.41, new stop 70.90, target 67.20, unrealized points = + 0.90, unrealized P/L = + $45


Per Friday’s newsletter, we shorted the opening rally in OIH, then took profits on half the position later in the day and remained short the second half of the position overnight.

Edited by Deron Wagner,
MTG Founder and