The Wagner Daily


Last Thursday’s break of major support levels on the S&P 500 and Dow Jones Industrials caused both indices to follow-through with another day of high volume selling on Friday, as the S&P and Dow lost 1.7% and 1.9% respectively. The Nasdaq Composite fared no better and lost 2.0%. The 1.7% loss in the S&P 500 put the index below its 200-day moving average, which means all three of the major indices are now firmly below their 200-day MAs. Given last Thursday’s technical breakdown of the chart patterns we discussed, Friday’s percentage losses were not shocking. However, one thing pleasant surprise was that Friday’s losses occurred as a result of a steady intraday downtrend as opposed to a large opening gap and subsequent choppy intraday action. Interestingly, Friday marked the third consecutive “trend day” in the broad market, something the major indices have not seen in a long time. After a month of choppy and indecisive action, it was refreshing to see three consecutive days of a steady trend. In fact, the 20-MA on the 15 minute chart has been acting perfectly as resistance during the past three days. The chart of SPY (S&P 500 Index Tracking Stock) illustrates this:

For the week, the Dow Jones Industrial Average lost 3.6%, its worst weekly loss since March of 2003. The Nasdaq Composite’s 4.5% drop was its largest weekly loss since August of 2004. More important than the percentage losses, however, is that all of the losses occurred on higher volume. Total market volume in the NYSE increased by 15% on Friday, while volume in the Nasdaq came in 22% higher. This means that Friday was the third consecutive “distribution day” for the S&P and Dow, and the second consecutive one for the Nasdaq. A quick look at last week’s losses in relation to the total market volume levels makes it abundantly clear that institutions have been heavily selling for the past three days.

Because Friday’s losses occurred without even a small bounce in which to initiate new short positions, we did not sell short any of the broad-based ETFs. However, we were fortunate to have been long the only two sector ETFs that ignored the market and showed major strength throughout the day. Thanks to some positive news within the sectors, both BBH (Biotech HOLDR) and PPH (Pharmaceutical HOLDR) turned in strong performances. BBH gained a whopping 6% on Friday, surpassing our original price target by more than 5 points! PPH gave back some of its earlier intraday gain, but still closed 0.8% higher. Even before Friday’s gains, both sector ETFs were outperforming the major indices, providing an example of how trading individual sector ETFs with relative strength or weakness to the broad market is often a great strategy.

We took our 10-point profit on BBH by selling half the position in the morning, then using a 1-point trailing stop to maximize the intraday gain. However, we will be stalking BBH for a potential re-entry this week because it closed at a new 4-year high on Friday. On an intra-week basis, BBH traded above last week’s close several times last year, but its highest weekly closing price within the past four years was one point below Friday’s close of 153.90. The weekly chart of BBH below illustrates the new closing high:

Remember that corporate earnings season is in full swing and, given the overall bearish market sentiment, it is especially important to be careful about holding long positions through their earnings dates. Even “good” earnings reports usually fall victim to selling when the general market sentiment is bearish. Because the broad market has fallen so sharply in such a short period of time, it is probably a bad risk to enter new broad market short positions at current price levels. Given the overhead supply, the major indices may not bounce much from here, but it is safer to at least wait for a day or two of sideways consolidation to allow the moving averages to catch up to the prices.

Instead of trading the broad-based ETFs, consider the other opportunities within individual industry sectors. Don’t forget that institutional money always is being moved from one sector to another, even when most sectors are showing weakness. Right now, it’s clear that the “smart money” is flowing out of the tech, retail, and financial sectors and into the drug and biotech sectors. The Home Construction Index ($DJUSHB) also continues to show continued weakness and remains poised for further downward prices. As such, our best sector ideas right now are to remain long the drug and biotech sectors and short the home construction stocks (as discussed in last Thursday’s newsletter).

Today’s watch list:

There are no new trade setups for today, although we are watching BBH for a potential re-entry this 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:

    BBH long (re-entry, from April 12) –
    bought 143.20, sold 153.31 (avg.), points = + 10.11, net P/L = + $1,009

Open Positions:

    PPH long (from April 7) –
    bought 72.80, new stop 72.90, target 77.60, unrealized points = + 2.65, unrealized P/L = + $265


Per intraday alert, we scaled out of BBH in two separate sell points last Friday. The first was at the 151.80 area, the second was near 154.80, which triggered from a 1-point intraday trailing stop. As for PPH, we remain long and have raised the stop.

Edited by Deron Wagner,
MTG Founder and