The Wagner Daily


The broad market closed higher on a strong increase in volume yesterday, but the major indices demonstrated relatively bearish action by closing near their intraday lows. Sparked by a strong report from computer storage company Network Appliances, the Nasdaq Composite gapped up to open above the previous day’s high. It subsequently rallied throughout the first half of the day, climbing as much as 1.6% above the previous day’s close, but sellers stepped in during the early afternoon and caused the index to reverse back down to test its morning low. A small bounce during the last thirty minutes of trading prevented the index from closing at its low of the day, but most of the Nasdaq’s 1.0% closing gain was the result of the opening gap. Both the S&P 500 and Dow Jones Industrial Average traded in a similar fashion, but showed more relative weakness and actually probed below their morning lows during the afternoon selloff. Like the Nasdaq, a small bounce into the closing bell lifted both indices off their worst levels of the session. The S&P 500 and Dow Jones each gained 0.6% yesterday. Below is an intraday chart of SPY (S&P 500 Index ETF) that illustrates how the broad market gapped up to open above the previous day’s high, rallied in the morning, reversed to set a new intraday low, then finally closed in the lower half of the day’s range:

Looking at the daily chart of the S&P 500 Index, yesterday’s action shows up as a failed breakout to a new high. Notice how it traded to a new high of the week intraday, but closed down in the range of consolidation. This is represented by the long “wick” or “tail” on the candlestick of yesterday, which often leads to lower prices the following day:

Total market volume in the Nasdaq surged 17% higher yesterday, marking the single highest volume day in the Nasdaq since April 29 (which was a “distribution day”). Volume in the NYSE also came in approximately 24% higher than the previous day’s level. Because both the S&P and Nasdaq closed higher yesterday AND on higher volume, it was technically a bullish “accumulation day.” However, considering that the major indices closed near their lowest levels of the session, bulls should be reluctant to get very excited about the strong volume increases. Analyzing yesterday’s volume a bit closer, you will also notice that the volume was as equally high during the afternoon selloff as it was during the morning rally.

As per the intraday e-mail alerts that were sent to subscribers yesterday, we took profits on our long position in SMH (Semiconductor HOLDR). Although it had not yet achieved our anticipated price target, the problem is that the closely followed $SOX index ran into resistance of its 200-day moving average. SMH was still trading below resistance of its 200-day MA, but SMH follows the $SOX index, not the other way around. Therefore, we made a decision to sell half of SMH at its mid-day high, and trailed a tight stop on the remaining half position, which later triggered during the afternoon selloff. This resulted in an average sell price of $34.41 on the full position, which equated to a net percentage gain of 5.3% since our November 12 entry. The daily chart of the $SOX below illustrates how the index ran into resistance of its 200-day MA yesterday. Obviously, this is likely to act as a resistance level going into today as well:

Despite yesterday being an “accumulation day,” we now recommend caution on the long side of the market, at least in the short-term. The broad market, which was already quite extended away from support, surged to new highs AND on much higher volume yesterday. But the afternoon reversal down to the morning lows suggests that institutions were using yesterday morning’s gains as a chance to sell into strength and lock in profits. When this occurs, the bearish action of the afternoon usually follows through to the downside the following morning. The resistance levels of the $SOX index, as discussed above, is another reason to be cautious. While we do not advocate aggressively entering new short positions here, the daily and hourly charts of the major indices are starting to look poised for a correction. Therefore, it is probably a pretty decent risk to “test the water” on the short side of the market. But if you do, be sure to keep tight stops in place because the broad market has been, as you know, quite resilient lately. As for long positions, continue trailing those stops to protect your gains. You may want to use any strength in the broad market today as a chance to unload your long positions. If the major indices continue to go higher from here, remember you can always simply re-enter your positions. Excessive greed to catch every last penny of a rally always kills many investors and traders.

Today’s watch list:

IWM – Russell 2000 Small-Cap Index Tracking Stock

Trigger = below 123.40 (below yesterday’s low)
Target = 119.10 (support of the 20-day MA)

Stop = 125.85(above yesterday’s high)

Notes = We are certainly not bearish on the broad market here, but are just looking to take advantage of what appears to be a coming short-term correction. As always, the play is only valid if it trades through the trigger price. Otherwise, the play will carry more risk.

OIH – Oil Service HOLDR

Trigger = above 80.79 (above yesterday’s high and hourly downtrend line)
Target = 83.90 (just below prior high on daily chart)

Stop = 79.10 (below 200-MA/15 min.)

Notes = After a 6-week correction, it appears the very strong Oil Service index is poised to resume its primary uptrend that has been intact for a year. We will buy OIH only on a break above yesterday’s high, which would correlate with a break of the hourly downtrend line and the 20/50-day MA convergence.

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:

    SMH long (from Nov. 12) –
    bought 32.65, sold 34.41 (avg.), points = + 1.76, net P/L = + $522

Open Positions:

    PPH long (from Nov. 15) –
    bought 69.75, stop 68.90, target 71.65, unrealized points = (0.10), unrealized P/L = ($10)


Per intraday e-mail alerts, we took profits on SMH yesterday. Still long PPH

Edited by Deron Wagner,
MTG Founder and