The Wagner Daily


The caution we suggested in yesterday’s newsletter turned out to be perfectly warranted, as both the S&P 500 and Nasdaq Composite reversed and sold off sharply after hitting their respective resistance points. The day began with a large opening gap up, but the excitement quickly faded as traders used the gap as an opportunity to sell into strength. After the first hour of trading, the S&P 500 Index entered into a steady intraday downtrend that eventually erased the gains of the prior two days. Major weakness in the financial sectors, particularly the Insurance Index ($IUX), was a contributor to the S&P’s 1.0% loss. Both the Nasdaq Composite and Dow Jones Industrials also trended lower throughout the entire day, but both indices only gave back about half of the prior day’s gains. The Nasdaq lost 0.7% and the Dow Jones shed 0.6%. The Semiconductor Index ($SOX) showed great relative strength and managed to close 1.0% HIGHER yesterday, but the weakness in the broad market still caused the sector to close in the middle of its intraday range.

More bearish than yesterday’s failed opening gap up was the fact that total market volume in the NYSE increased by a whopping 26% and was 14% higher in the Nasdaq. Because both the S&P and Nasdaq closed lower AND on higher volume, yesterday was a bearish “distribution day,” which is representative of institutional selling. Within the past four weeks, the Nasdaq has had three distribution days and the S&P has had five. A healthy market can usually absorb two to three distribution days in a four week period, but usually sustains further losses if the count rises beyond that. Given that the prior “up” day occurred on lighter volume, it was not surprising that yesterday’s “down” day occurred on heavier volume. Unfortunately for the bulls, this is the type of price-volume relationship we typically see in a bearish market. However, Monday’s lighter volume “up” day, combined with last week’s multiple “distribution days,” gave us a major warning sign that yesterday’s opening gap might not hold up. As such, we used the MTG Opening Gap Rules, were prepared for the weakness, and profited from several short positions in individual stocks yesterday. MTG’s new e-newsletter that will focus on individual stock trades, The MTG Stalk Sheet, will alert you to potentially profitable swing trading opportunities such as these. Look for its launch and sign up for a free one-month trial on November 1.

In yesterday’s newsletter, we alerted you to the abundance of overhead resistance the S&P 500 would need to contend with on any rally attempt. We specifically pointed to resistance of the prior uptrend line that also happened to converge with resistance of the 200-day moving average. Interestingly, the prior uptrend line prevented the S&P from holding onto yesterday’s opening gains, and subsequently triggered the heavy selloff. This is a clear example of how a prior area of support becomes an area of resistance, after the support is broken. The daily chart of the S&P 500 below illustrates this:

As you can see, the S&P closed just above an area of support near the 1,100 level. Since the 1,1100 area represents a double bottom from the September 28 low, a break below this level would be bearish because it would represent the first “lower low” since the prior uptrend was broken. In our opinion, a break below the 1,1100 level would justify a new short position in SPY (S&P 500 Index). As for overhead resistance, there is now plenty of overhead supply that should prevent the index from making any significant upward headway.

Although it showed more relative strength, the Nasdaq Composite also ran into a resistance level we discussed, which was that of its October 13 high. On the chart below, notice how that prior high acted as resistance (the horizontal red line), although the current uptrend in the Nasdaq (the upward sloping blue line) still remains intact:

Because the Nasdaq is still above support of its primary uptrend line, but the S&P remains well below it, we expect choppy trading conditions to continue. If you want to be long right now, consider the tech-related sectors, specifically the Semiconductors, which have recently begun diverging from the broad market. You should also consider long positions in the Gold/Silver Mining Index ($XAU), which we have discussed extensively over the past month. Most of the gold and silver stocks continue to show bullish weekly charts and are now consolidating their gains on the daily charts. The usual suspects in that sector are: NEM, ABX, GFI, AU, HMY, GG, PDG, CDE, PAAS. As for shorts, consider the “old economy” sectors that were formerly leading the rally in the Dow. Sectors such as Energy, Basic Materials, Banking, and Drugs are all showing relative weakness.

Today’s watch list:

SPY – S&P 500 Index Tracking Stock

Trigger = below 110.35 (below support of the double bottom on daily chart)
Target = 108.50 (support of the Aug. 18 low)
Stop = 111.25 (above yesterday’s close)

Notes = See our analysis on the S&P 500 area of support in the commentary above. Also, note that the MTG Gap Rules apply. So, we will NOT short SPY if it gaps down to its trigger price, UNLESS it subsequently sets a new low after the first 20 minutes of trading.

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:

    HHH short (from Oct. 12) –
    shorted 59.72, covered 61.38, points = (1.66), net P/L = ($336)

Open Positions:

    HHH short (re-entry, from Oct. 19) –
    shorted 60.20, stop 61.35, target 57.15, unrealized points = + 0.11, unrealized P/L = + $22


We stopped out of HHH yesterday (barely), but re-entered before the close. New entry, stop, and target listed above.

Edited by Deron Wagner,
MTG Founder and