The Wagner Daily


Like the previous day, the broad market began the day with an opening gap down, but this time it failed to recover. Instead, the major indices trended steadily lower throughout the day and closed at their worst levels of the session. The Nasdaq Composite closed 1.1% lower, its biggest drop since the index lost 1.2% on June 3. The S&P 500 Index fell 0.7% and the Dow Jones Industrial Average lost 0.8%. Small-cap stocks were the hardest hit, as the Russell 2000 Index shed 1.7%. The S&P 400 Mid-Cap Index lost 0.9%. Not surprisingly, the indices that gained the most during July’s rally were also the hardest hit in yesterday’s broad-based correction.

Nearly every industry sector closed lower yesterday, but a gain of 0.6% made the Oil Service Index ($OSX) the exception. Retail stocks dropped sharply and many of them broke their primary uptrend lines. As such, we have listed RTH (Retail HOLDR) as a potential short candidate on “Today’s Watchlist” below. The Semiconductor Index ($SOX) also gave up 2.4% yesterday, but that’s not too bad considering the index has rallied 16% since July 1. The drop in the $SOX caused half of our SMH position to hit its trailing stop at $37.70, enabling us to lock in a gain of more than 8%. We still remain long the second half of the position. The Gold and Silver Index ($XAU), which broke out above resistance the previous day, initially traded higher yesterday morning, but drifted lower and closed near the prior day’s high and unchanged. We continue to like this sector for new intermediate-term long entries (reference yesterday’s Wagner Daily for a list of potential gold/silver plays).

Although the losses in the major indices were substantial, the one positive is that volume in both exchanges did not correspondingly surge higher with the selling. Total volume in the Nasdaq declined by 10%, while volume in the NYSE was 2% lighter than the previous day. One could argue that market volume has been lighter due to the “summer doldrums” in which traders are away on vacations. This may be true, but the fact still remains that higher volume on the up days combined with lower volume on the down days is bullish, even if the overall volume levels are mostly below average. Within the past four weeks, both the S&P 500 and Nasdaq Composite have only seen one confirmed day of higher volume selling (“distribution”). A majority of the “up” days during that period have also been on higher volume, which continues to indicate institutional accumulation. While yesterday’s losses raise a yellow flag in the short-term, our overall bias will remain bullish unless we begin to see “distribution days” that typically indicate institutional selling.

Looking at the broad market, yesterday was the first day in more than a month that each of the major indices closed firmly below support of the 50-period moving averages on their hourly (60-minute) charts. Correspondingly, the S&P, Nasdaq, and Dow also broke below support of their hourly uptrend lines that had been in place since the middle of July. The hourly chart of the S&P 500 below illustrates this:

While a one-day closing price below the hourly uptrend line does not mean the primary uptrend has been broken, it does provide us with our first reason to be cautious on the long side of the market since the current rally began on July 7. At the least, odds are good that the broad market will experience a short-term correction of 2 to 5 days. As such, we do not recommend aggressively entering new long positions until we see if yesterday’s action was merely a shakeout or the beginning of a more substantial correction. Instead, focus on managing existing long positions and trailing stops appropriately. If you are in stocks or ETFs that are near key areas of price support, such as moving averages, trendlines, or prior highs, consider raising your stop to just below those levels in order to protect your gains and/or minimize your losses in the event of further selling.

Just as now is not the ideal time to enter new long positions, it is equally risky to enter a bunch of short positions at the first hint of trouble. But it is a good idea to begin preparing a list of potential short candidates so you are prepared if the opportunity for shorting presents itself. We feel the best scenario for shorting the broad-based ETFs would occur if the major indices break through support of their 20-day moving averages, then subsequently bounce into resistance of those same moving averages. Waiting for the first clear break of support and then shorting the next bounce is infinitely safer than trying to pick tops of a rally.

The market will surely tell us which side to be positioned on over the next several weeks, but patience is crucial right now. Novice traders often give back profits they made in uptrends by overtrading during transitional periods in the markets. Remember that cash is always king and there are always plenty of new opportunities if you happen to miss one. Most importantly, always trade what you see, not what you think!

Today’s Watchlist:

RTH – Retail HOLDR

Trigger = below 100.20 or above 100.90 (whichever comes first)
Target = 96.40 (support of the 200-day MA)
Stop = 102.25 (above upper channel of the hourly downtrend line)
Shares = 400

Notes = RTH broke below support of its uptrend line that had been in place since the low of April 29. Also notice the high volume on yesterday’s selloff, which is what you want to see on a short candidate. We now expect further follow through to the downside, with a first target of the 200-day moving average. You may need to call your broker and ask them to locate shares of RTH for shorting, as some firms do not keep a large inventory of this ETF.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of trades that were closed since the last newsletter, as well as an update on all open positions from The
Wagner Daily
. Net P/L figures are based on the $50,000 Wagner Daily model account size.

    Closed positions (since last report):

      SMH long (HALF position, from June 1) –
      bought 34.82, sold 37.66, points = + 2.84, net P/L = + $423

    Open positions (coming into today):

      SMH long (150 shares (half position) from June 1) –
      bought 34.82, stop 35.70, first target 38.85, then 44.90, unrealized points = + 2.34, unrealized P/L = + $351

      EWA long (800 shares from Aug. 3) –
      bought 18.36, stop 17.75, target of new highs (will trail stop), unrealized points = (0.12), unrealized P/L = ($96)

    Current equity exposure ($100,000 max. buying power):



      FXI hit our trailing stop and EWA triggered for new long entry yesterday. We also remain long SMH with the same split stop prices.

      for glossary and explanation of terms used in The Wagner Daily

      Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader