The Wagner Daily


Yesterday’s trading session was rather uneventful, as the major indices each closed near the flat line on lower volume. The broad market opened near the previous day’s closing prices, then traded sideways in a relatively narrow range for the remainder of the day. The Dow Jones Industrial Average showed relative weakness and closed 0.3% lower, but the Nasdaq Composite Index closed flat and the S&P 500 Index closed only 0.1% lower. Total volume in the NYSE was 16% lower than the previous day, while volume in the Nasdaq declined 18%. Although this type of light volume, sideways price action is not conducive to intraday trading, the market acted just fine considering the strong rally off the previous day’s lows. When the broad market rallies sharply, as it did on Wednesday afternoon, you generally want to see consolidation on lighter volume the following day, which is exactly what occurred. Conversely, a significant drop on higher volume yesterday would have been bearish because it would have indicated the bears were selling into the strength of Wednesday afternoon’s rally. Instead, the lighter volume consolidation was simply a “correction by time” that enabled the market to catch its breath.

Have you noticed that the Nasdaq Composite is forming an inverse head and shoulders pattern over the past three days? While a head and shoulders pattern is bearish, an inverse head and shoulders is bullish. We have illustrated this chart pattern on the hourly chart of the Nasdaq below:

As you can see, the left shoulder was formed on Tuesday, the head was formed during Wednesday’s morning selloff and afternoon reversal, and the right shoulder was formed yesterday. In order for this bullish chart pattern to follow through, the Nasdaq needs to rally and stay above the “neckline,” which is the horizontal red line around the 1931 area. The Nasdaq briefly traded above the 1931 area yesterday morning, but failed to hold above it, so the 1931 resistance remains intact. Failure of the pattern would occur if the Nasdaq breaks below Wednesday’s low of 1878. If you look at hourly charts of the Dow and S&P 500, you will see similar formations over the past three days, which means the odds should favor a move higher over the next day or two. However, remember that each of the major indices have resistance of their primary downtrend lines just overhead, as we illustrated on the daily charts in yesterday’s newsletter.

In order for Wednesday’s rally to be meaningful, the broad market needs to close higher AND on higher volume, either today or Monday. This would be bullish because it would represent a “follow-through” day to Wednesday’s reversal. On the other hand, be very cautious on the long side if the broad market closes lower or flat today AND on higher volume, as this would indicate distribution that could easily undo Wednesday’s reversal. As we mentioned a few days ago, this is NOT the time to be aggressive with your trading on EITHER side of the market. Remember that cash is king and capital preservation needs to be your primary goal during highly indecisive and erratic trading environments. Most importantly, always trade what you see, not what you think!

Today’s watch list:

We’re not listing any “official” trade setups today because we want to make sure the broad market can rally above the neckline of the inverse head and shoulders pattern first (per commentary above). However, we may buy a few broad-based ETFs if this occurs, and will send an e-mail alert when/if we enter any new positions. For now, we are long TLT.

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 long (from May 13) –
    bought 100.48, sold 100.99, points = + 0.51, net P/L = + $98

    IEF long (from May 11) –
    bought 81.79, sold 81.33, points = (0.46), net P/L = ($98)

Open Positions:

    TLT long (from May 13) –
    bought 80.85, stop 80.39, target 82.90, unrealized points = (0.20), unrealized P/L = ($40)


Per intraday e-mail alert, we bought TLT yesterday afternoon, sold DIA into strength, and stopped out of IEF.

Edited by Deron Wagner,
MTG Founder and