The Wagner Daily


Just as the broad market gapped up and rallied higher on Monday, the major indices gapped down and trended lower throughout yesterday. The Dow Jones Industrial Average once again showed the most relative strength because it only closed 0.6% lower and retraced less than the 38.2% Fibonacci retracement level from the gains of the prior two days. The S&P 500 Index retraced just over 50% of its gains from the prior two days, and closed with a loss of 1.0% yesterday. The Nasdaq Composite Index, however, demonstrated major weakness yesterday because it closed with a loss of 1.6% and gave back most of the gains from the prior two days. This was primarily due to major weakness in both the Biotech ($BTK) and Semiconductor ($SOX) Indexes, both of which shed more than 3% yesterday.

More important than yesterday’s broad-based losses is the fact that total market volume increased by 7% in the NYSE and 4% in the Nasdaq. Because the major indices closed with losses yesterday AND on higher volume, this means it was a bearish “distribution day,” the first one in weeks. As you know, we have been extensively discussing the fact that volume has been lighter than average during every rally of the past several weeks. The problem with this is that it only takes a bit of institutional selling to undo the gains that occurred on lighter volume. Yesterday’s selloff, in which volume increased, was a prime example of this. Therefore, we continue to be of the opinion that, regardless of how bullish the daily charts may look, we cannot be overly aggressive on the long side until volume begins to confirm the “up” days.

If you’re a bull, the bad news is that the major indices trended steadily lower yesterday. But if you’re a neutrally-biased short-term trader who take advantage of both sides of the market, you probably found a lot of opportunities for making profits yesterday. As short-term traders, we never care which direction the market trends each day, but the important thing is just that it trends! While most weeks are filled with a majority of choppy and indecisive days, this week has brought us two smoothly trending days. The broad market trended perfectly higher on Monday, as it set “higher lows” and “higher highs” throughout the day. Then, after consolidating for a day, it trended lower in just as smooth of a fashion yesterday. If you’re a swing trader or investor who only takes bullish long-term positions in the market, this is probably not the type of action you want to see. But if you’re a nimble trader, Monday provided a plethora of intraday buying opportunities, while yesterday provided an equal number of opportunities for selling short. We netted a profit of nearly 5 points through a short position in BBH (Biotech ETF) yesterday, and also netted more than 1 point by shorting HHH (Internet ETF).

Going into today, the major indices now appear to be out of sync with each other because the Nasdaq was so weak yesterday, but the Dow, and even the S&P 500, held up pretty well. When one major index is weak, but another is strong, it usually creates choppy and erratic trading conditions the following day because one index acts as an anchor, while the other index is simultaneously trying to lift the broad market higher. The hourly chart of the Nasdaq Composite below illustrate how the index retraced nearly all of its gains from the prior two days during yesterday’s selloff:

When an index retraces beyond the 61.8% Fibo retracement level, it often means the momentum of the trend is likely to reverse.

The heavily weighted Semiconductor Index ($SOX) may have formed a perfect double top at the 490 area. Keep a close eye on this level during the next several days because the inability to rally above this level will certainly be bearish for the Nasdaq, and the whole broad market:

Unlike the Nasdaq Composite, which retraced more than 70% of its recent gains, the Dow Jones Industrial Average corrected by only a small relative margin yesterday and still looks bullish on the hourly chart:

With the major indices out of sync, today is likely to be marked by choppy and erratic trading, especially when you consider that we have already had two trending days this week. The major indices remain above their key moving averages and look pretty good on the weekly charts, but volume still is not confirming any upward movements. So, continue to use caution on BOTH sides of the market and, as always, obey your stops!

Note that the U.S. equities markets will be closed tomorrow, June 11, in honor of President Reagan’s passing. The Wagner Daily will not be published tomorrow, but regular publication will resume on Monday.

Today’s watch list:

(There are no new plays for today, though we remain short half position of HHH, which we entered yesterday via intraday e-mail alert.)

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:

    BBH short (from June 8) –
    shorted 145.42, covered 140.96 (avg.), points = + 4.46, net P/L = + $443

    HHH short (HALF position, from June 9) –
    shorted 60.95, covered 59.86, points = + 1.09, net P/L = + $107

Open Positions:

    HHH short (HALF position, from June 9) –
    shorted 60.95, new stop 61.20, target 58.50, unrealized points = + 1.26, unrealized P/L = + $126


Per intraday e-mail alert, we scaled out of BBH for nearly a 5 point avg. profit yesterday. We also shorted HHH in the morning, covered half the position for a profit in the afternoon, and took the remaining shares overnight.

Edited by Deron Wagner,
MTG Founder and