The Wagner Daily


The major indices followed up Monday’s losses with another day of broad-based selling that occurred on the highest volume in more than a year. Like the previous day, the broad market trended steadily lower throughout the entire day, with each of the major indices closing near their worst levels of the session. The Nasdaq Composite again sustained the most damage and closed 2.1% lower. The S&P 500 Index lost 1.2% and the Dow Jones Industrial Average dropped 0.9%. During the past two days, the Nasdaq has been leading the way lower, while the Dow has been showing the most relative strength. However, remember that the Nasdaq was formerly leading the way higher, while the Dow had been lagging in the months prior. As short-term traders, we don’t really care which direction the market goes, just as long as there is a trend. Given the prior month’s lack of volatility and numerous narrow-range days, the smooth intraday trends of the past two days have been a welcome relief. We closed the IWM short position, for example, with a gain of 4.4 points yesterday.

Total market volume in the Nasdaq surged another 23% yesterday, while volume in the NYSE was 14% higher than the previous day’s level. Curiously, the Nasdaq’s 2.74 billion shares was the highest single day of volume the exchange has seen since June 6, 2003 (NOT 2004)! Because the major indices closed lower and on higher volume, this means yesterday was another confirmed “distribution day.” Yesterday marked the second consecutive “distribution day” in the Nasdaq, and the fourth within the past four weeks. Furthermore, the last four days in which volume has come in above its 50-day average level have been days the Nasdaq closed lower. The recent surges in volume, which have been accompanied by significant losses, are the footprints of institutional selling. Astute traders will recognize this and heed the warning signs of being aggressively positioned on the long side of the market.

In yesterday’s newsletter, we illustrated how each of the major indices had broken below support of their primary uptrend lines, but were sitting on support of their 20-day moving averages. While support of a 20-day moving average often enables a stock or index to bounce, the S&P, Nasdaq, and Dow each ignored their respective 20-day MAs and closed firmly below them yesterday. The broad market’s inability to at least put in a small bounce after Monday’s losses was not an encouraging sign for the bulls. Nor was the huge volume that accompanied the losses. Going into today, keep an eye on support of the 50-day moving averages, which are much more significant than the 20-day MAs. For each of the major indices, the 50-day MA is currently at the following levels: S&P 500 – 1,178 (10 points below yesterday’s close), Nasdaq Composite – 2,092 (15 points below yesterday’s close), Dow Jones – 10,489 (141 points below yesterday’s close). If the major indices approach support of these levels today, you may consider taking profits or aggressively tightening your stops on any short positions. As for resistance, the 20-day moving averages are now the first major area to watch. Above that, the prior uptrend line will provide additional resistance in the broad market.

After the Feds hinted at possible inflation risks in yesterday’s “minutes,” interest-rate sensitive stocks sold off sharply. One group that particularly caught our attention was the Home Construction Index ($DJUSHB), which closed more than 4% lower yesterday. While the index is still in a confirmed uptrend on both its daily and weekly charts, you may want to keep an eye on the sector because yesterday’s selloff wiped out the prior three weeks of gains and also caused the index to close below support of its 20-day moving average. Take a look:

It’s too early to declare the uptrend is over, but the sector is certainly worthy of keeping an eye on as a short candidate, especially if the uptrend lines break over the next several days. There is not an ETF that tracks the Home Construction stocks, but you may wish to create your own “synthetic ETF” by simultaneously trading a small basket of the leading stocks within the industry. Some stocks to look at are (in no particular order): TOL, LEN, PHM, KBH, RYL, BZH, DHI.

Over the next few days, you may want to consider being mostly cash or perhaps sitting on a few short positions. The broad market has dropped quite a bit within only two days, so making the decision to aggressively put on new short positions today may be a risky move. Conversely, the intensity of the selling the past two days means it is probably not wise to use the pullback as a chance to enter a bunch of long positions, especially since many of the best looking long setups have been failing. If you’re currently short, continue trailing your stops to lock in profits. If you’re still long, now is NOT the time to be stubborn and shift into “hope” mode. Cut the losses if they have exceeded your stops! If, however, you are now in cash, your best bet is probably to wait for the next bounce in order to sell short into resistance of the 20-day moving averages. As always, remember to trade what you see, not what you think!

Today’s watch list:

We are looking at a few short candidates in the broad market, but want to wait for a bounce first. As always, we will send an intraday e-mail alert to subscribers when/if we enter any new positions. We closed the IWM short position for more than a 4.4 point gain yesterday.

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:

    IWM short (from Jan. 3) –
    shorted 129.60, covered 125.17, points = + 4.43 net P/L = + $441

Open Positions:



Per intraday e-mail alert, we covered IWM yesterday because it fell towards our target so quickly. We are now flat the ETFs.

Edited by Deron Wagner,
MTG Founder and