The Wagner Daily


Due to the Fed decision on interest rates, which was due in the afternoon, yesterday morning’s session was uneventful. Volume was light and each of the major indices traded within the previous day’s range. At 2:15 pm EST, the FOMC announced they would leave interest rates unchanged, but “believes that policy accommodation can be removed at a pace that is likely to be measured.” Initially, the broad market’s reaction was quite positive. The Nasdaq Composite rallied from a miniscule gain of 0.1% to more than 1.6% within the first 45 minutes following the Fed announcement. Both the S&P 500 and Dow Jones Industrials moved in a similar manner. But, as we often see on FOMC days, the broad market reversed into the close and caused each of the major indices to give back nearly all their gains. When the dust settled, the Nasdaq Composite Index managed to close with a gain of 0.6%, but the Dow Jones Industrial Average closed flat. The S&P 500 Index closed only 0.2% higher. The broad market’s wild volatility after yesterday’s Fed announcement tells us that traders were a bit confused and unsure how to react to the comments.

Not surprisingly, volume was very low before the FOMC announcement on interest rates, as most traders waited on the sidelines. Total market volume obviously increased after the announcement, but still came in relatively light for the day. Turnover in the NYSE rose 7%, but volume in the Nasdaq was 7% lighter than the previous day. Once again, the Nasdaq failed to close with gains AND on higher volume. It has been nearly two weeks since the Nasdaq had an “accumulation day,” although there have been numerous “distribution days” consisting of lower closing prices on higher volume.

Yesterday’s volatility in the afternoon made it difficult to stay with our short position in SPY (S&P 500 Index), although we micro-managed the trade and everything worked out fine. Although we rarely loosen a protective stop once it has been set, we noticed that SPY had solid resistance of the 20 and 50-day moving averages overhead, which converged at the 113.30 – 113.40 area. We also know that Fed-driven rallies often fizzle out quickly, and we did not want to get shaken out prematurely. Since our initial stop was at 113.22, we calculated that it made sense to take a little additional risk and adjusted the stop up to 113.52, which was just ABOVE the moving average resistance. Like magic, this convergence of the 20 and 50-day moving averages stopped the rally dead in its tracks and eventually caused SPY to drop back down to its pre-Fed announcement level around 112.10. The daily chart of SPY below illustrates how these moving averages perfectly marked the high of yesterday’s rally:

Although SPY eventually came all the way back down, we made a prudent decision to cover half of the SPY position when it retraced down to the 112.90 area. We did this because SPY could just as easily have retraced a bit and then rallied to a new intraday high. By covering half of the position on the pullback, we minimized our loss and reduced our risk. But, keeping half the position open still enabled us to profit from the subsequent drop in SPY.
Interestingly, DIA (Dow Jones Industrial Average) also stopped perfectly at convergence of its 20 and 50-day moving averages. Take a look:

I am inclined to say that the broad market’s inability to sustain yesterday’s post-FOMC gains is bearish. However, I also know that we often do not see the real reaction to Fed meetings until the following day because there is too much institutional juxtapositioning that takes place immediately following the announcements. Therefore, we have a cautious and relatively neutral stance going into today. Obviously, a break below yesterday’s lows would be quite bearish, while a break back above the 1118 level in the S&P would be bullish. We’ll have a mcuh better idea which way to position ourselves after we see how the market reacts today. If you are looking for a few low risk plays, consider buying some gold stocks, many of which broke out of their daily downtrends yesterday. There is not yet an ETF that tracks gold, but you can created a synthetic ETF by trading a basket of the leading gold stocks such as NEM, PDG, ABX, AU, etc. You may also check out silver miners such as CDE and PAAS, the latter of which we bought in the MTG Intraday Real-Time Room yesterday and currently have a nice unrealized gain. We also should see weakness in our OIH short position today, due to comments after the close that OPEC is at overcapacity.

Today’s watch list:

We remain short half position of SPY and full position of OIH, but there are no new plays for today.

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:

    SPY short (HALF position, from May 3) –
    shorted 112.15, covered 112.92, points = (0.77), net P/L = ($78)

Open Positions:

    SPY short (HALF position, from May 3) –
    shorted 112.15, new stop 113.52, target 109.30, unrealized points = + 0.09, unrealized P/L = + $9

    OIH short (re-entry, full position from May 3) –
    shorted 70.95, new stop 71.65, target 67.20, unrealized points = + 0.33, unrealized P/L = + $33


Per intraday e-mail alert, we covered half of SPY for a loss yesterday and adjusted the stop on the remaining half position. We also lowered the stop on OIH short, which is now “in the money.”

Edited by Deron Wagner,
MTG Founder and