The Wagner Daily


For the second consecutive day, the S&P 500 Index closed within 0.1% of unchanged, and the Dow Jones Industrial Average closed flat. The S&P 500 Index gained 0.1% on Wednesday, but lost the same percentage yesterday. The Nasdaq Composite Index, which also closed with a gain of 0.1% on Wednesday, showed relative weakness to both the S&P and Dow yesterday, and closed with a loss of 0.7%. Total market volume in the NYSE increased by 11%, while volume in the Nasdaq increased by 9%. Yesterday was technically a bearish “distribution day” because both the S&P and Nasdaq closed with losses AND on higher volume. This marked the second “distribution day” in the Nasdaq within the past 4 days. While stocks can shrug off one or two of these “distribution days,” the occurrence of three or more within a two-week period is usually enough to trigger a significant selloff in the broad market. But, despite the increase in turnover, volume in both the NYSE and Nasdaq continued the trend of remaining well below average levels. There simply continues to be a lack of institutional participation, both on the up and down days — hence the lack of direction in the major indices.

Both the S&P and Nasdaq sold off sharply during the first hour of trading yesterday, but diverged sharply throughout the remainder of the day. After the initial morning selloff, the S&P 500 trended higher throughout the remainder of the day and briefly rallied to a new intraday high in the afternoon. The S&P eventually closed only 1 point lower than the previous day’s close. Conversely, the Nasdaq barely retraced just over 50% of its morning losses, and closed the day in the lower half of its intraday range. Below is a 5-minute intraday line chart that illustrates yesterday’s major divergence between the S&P 500 and the Nasdaq Composite. The red horizontal line represents the opening prices of both indices:

Yesterday’s price divergence between the S&P/Dow and the Nasdaq is significant because it represents institutional sector rotation. As discussed extensively in my first book, The Long-Term Day Trader, and my video, Sector Trading Strategies, there is usually an inverse relationship between various sectors. Because mutual funds and other institutions are typically required to be fully invested in the markets, money tends to flow into one sector as it simultaneously flows out of another. There was strong divergence within several industry sectors yesterday that clearly illustrated this fact. The Semiconductor Index ($SOX) was one of the weakest sectors yesterday and closed with a loss of 3.4%, but the Amex Oil Index ($XOI) closed with a GAIN of 1.3% and also closed at a new 52-week high! As money flowed out of the semiconductor and other tech-related sectors, it flowed into sectors such as oil and utilities. This could indicate a “flight to quality,” as money was moved out of the “riskier” sectors and into more “defensive” sectors that typically fare okay when the overall economy does not.

The major indices such as the S&P 500, Nasdaq Comp., and the Dow Jones Industrials remain in “no-man’s land” because they are stuck in a choppy, sideways trading range. As we determined last week, most of the major indices have rallied above the upper channels of their downtrend lines that were in place from earlier in the year, but have failed to confirm a trend reversal because they have been unable to form “higher highs” on the daily charts. When you combine this with the fact that volume has been so light, it causes even more indecision and erratic intraday movement in the indices. As such, it has been quite difficult to profit from trading the broad-based ETFs such as SPY, DIA, or QQQ. However, the good news is that we are beginning to see clear divergence within individual sectors, even on days when the broad market is just drifting sideways.

As a trader, your job is to identify which sectors are showing the most strength and weakness, relative to the broad market, and initiate trades within those sectors. In the case of yesterday, you could have profited on both sides of the market from simultaneously being short SMH (Semiconductor HOLDR ETF), but long OIH (Oil Services HOLDR ETF) or UTH (Utilities HOLDR ETF). SMH was so weak that it ignored the intraday rally in the S&P 500 Index, while OIH and UTH were both so strong that they ignored the weakness in the Nasdaq. If you learn to correctly identify the strongest and weakest sectors, you can significantly increase your odds of profitable trading during times of indecision or sideways trading in the broad market.

Note that today is “triple witching” options expiration day. As such, expect trading to be more volatile than usual, especially in the afternoon. Use caution with entering new trades on options expiration days.

Today’s watch list:

Due to the additional volatility that is usually created by “triple witching” options expiration day, there are no new setups for today. However, we will re-assess the markets on Monday and look to enter new positions at the beginning of next week.

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 short (HALF position, from June 15) –
    shorted 104.35, covered 103.98, points = + 0.37, net P/L = + $35

Open Positions:



We closed the remaining shares of DIA short for a profit yesterday, as noted above.

Edited by Deron Wagner,
MTG Founder and