Commentary:

The broad market reacted positively to a better than expected Consumer Price Index that was released before the open yesterday, easing concerns of a possible half-point rate increase at the next FOMC meeting. Despite broad-based weakness the previous day, the major indices gapped up and opened near the previous day’s respective highs and trended higher throughout the first half of the day. Sector rotation was prevalent, as the Nasdaq reversed the relative weakness of the prior two days and showed the most relative strength. At its intraday high, around 1:00 pm EST, the Nasdaq Composite Index was showing an impressive gain of 1.9%. However, sellers arrived on the scene in the afternoon and caused the index to drift lower in the afternoon before closing with a 1.3% gain for the day. The S&P 500 Index and Dow Jones Industrial Average both lagged behind the Nasdaq throughout the entire day, but followed a similar pattern of strength in the morning and weakness in the afternoon. A sharp selloff at 3:30 pm EST nearly caused the S&P and Dow to turn negative on the day, but moderate buying during the final thirty minutes enabled both indices to close above their intraday lows. The S&P 500 closed 0.6% higher, while the Dow only gained 0.4%.

Volume increased by 13% in the NYSE and 9% in the Nasdaq yesterday. Because the major indices closed higher AND on higher volume, this means that yesterday was technically an institutional “accumulation day,” which is bullish. Yesterday’s NYSE volume of 1.34 billion shares was the highest volume day since May 27, so it was encouraging to see the increase in turnover. Nevertheless, volume was still 5% below its 50-day average level. You have to go all the way back to May 25 to find a single day of volume that has exceeded its 50-day average. The 9% increase in Nasdaq turnover was even less impressive, as volume was still 11% below average. Because many traders are waiting to see the extent of the next interest rate increase, volume is likely to remain below average levels until the Feds meet on June 29.

Did you notice that just about every major industry sector closed with losses on Monday, but nearly every sector closed with gains yesterday? This type of indecision is typical of markets that are suffering from strong institutional participation. When total market volume is light, neither sell-offs nor rallies can be trusted. If the market is trending down all day, but on light turnover, the losses can easily be reversed by just one or two institutional players who decide to step in and buy. However, if the market is trending down, but on heavy volume, it requires much more buying pressure to reverse the losses. This is why it is safer to sell short when the market is closing lower, but on HIGHER volume (aka “distribution days”). Conversely, it is safer to be long a market that is rallying on high volume because the trend is likely to continue higher even if a few big players decide to sell. This is why we have been focusing so much on the broad market’s new trend of very light volume on both the up and down days. The bottom line is that light volume markets usually create choppy trading conditions. As such, the current environment requires you to be very nimble and ready to switch to the other side of the market at a moment’s notice. The current environment is NOT forgiving to those who fall in love with either long OR short positions right now.

Although we listed DIA (Dow Jones ETF) as a short setup in yesterday’s Wagner Daily, the trade was not valid because it did not drop below our original trigger price of 103.43. However, we sent an intraday e-mail alert to subscribers in the afternoon, informing them we were shorting DIA at 104.35 instead. So far, the trade is working out well and we have a small unrealized gain. However, for educational purposes, I wanted to show you a chart that explains why we made the decision to short DIA where we did, rather than waiting for it to drop down to our initial trigger price. Take a look at the 120-minute chart of DIA below. We do not normally use 120-minute charts, but we lengthened the time frame so that you can more easily see the trendline that began three weeks ago:

As the think red line illustrates, DIA had been in an uptrend that began with the low of May 25, and was anchored with the lows of June 3 and 4. The uptrend remained intact for 3 weeks, but the gap down and subsequent weakness of June 14 caused DIA to break below support of its trendline. As you know, prior support becomes the new resistance level once the support is broken, which means that the prior trendline support has now become the new resistance. This was clearly illustrated when DIA attempted to rally beyond yesterday’s opening gap, but was unable to do so because of this overhead trendline resistance. Because of this, along with the relative weakness the Dow was exhibiting yesterday, we made the decision to short DIA into strength, rather than wait for it to break down. Doing so provides us with a better risk/reward ratio because, if we’re right, we are short at the top of the range. If, however, the Dow continues to go higher, we will stop out with a very small loss, just over last week’s high.

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Today’s watch list:

(There are no new trade setups for today, although we remain short DIA, which we shorted at 104.35 yesterday.)

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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:

(none)

Open Positions:

DIA short (from June 15) –
shorted 104.35, stop 104.65, target 102.90, unrealized points = + 0.24, unrealized P/L = + $48

Notes:

Per intraday e-mail alert, we shorted DIA yesterday afternoon and took it overnight with a small unrealized gain thus far. Explanation of trade entry is discussed in commentary above.

Edited by Deron Wagner,
MTG Founder and
President