The Wagner Daily


Stocks attempted to rebound from their recent losses on Friday, but the gains were mild and volume declined. After beginning the day with an opening gap up, the major indices promptly drifted lower during the first hour of trading, then traded sideways in a tight and narrow range throughout the rest of the day. The S&P 500 finished the day 0.4% higher, the Nasdaq Composite gained 0.3%, and the Dow Jones Industrials managed a 0.1% gain. The smallcap Russell 2000 Index bounced 0.8% higher, but remember it was also was among the biggest losers last week. The midcap S&P 400 gained 0.4%. Despite Friday’s recovery attempt, the major indices still sustained sizable losses for the week. Small and midcap stocks suffered the most, as the Russell 2000 plummeted 3.5% and the S&P 400 fell 3.3%. The Nasdaq Composite lost 2.9%, the S&P 500 2.7% and the Dow Jones Industrial Average 2.6%.

Total volume in the NYSE fell by 24% last Friday, while volume in the Nasdaq was 31% lower than the previous day’s level. Volume in both exchanges fell to below their 50-day average levels. Investors may have been pleased to see the broad market halt its string of losses on Friday, but the sharp drop in turnover across the board indicates that institutions made no effort to jump back in the market. Analyzing the overall price to volume ratios of last week, it certainly does not bode well for coming week. The S&P 500 closed lower and on higher volume in four of the past five sessions, but the one “up” day was on much lighter volume. This pattern indicates an abundance of institutional distribution currently taking place, which means that long positions have a low chance of success in the current market.

Looking at the daily charts of the major indices, you will see that Friday’s session was an “inside day” for each of them. This occurs when both the intraday high and low is completely contained within the previous day’s trading range. When this occurs in the midst of a downtrend, it usually leads to continuation lower, just as an “inside day” during an uptrend is typically bullish. Overall, Friday’s modest gains did little to change the technical picture of the broad market indices since our last analysis. The S&P 500 finished the week below both its 200-day moving average and its prior weekly uptrend line that we annotated in last Friday’s Wagner Daily. Conversely, the Nasdaq is holding just above its 200-day MA and weekly uptrend line, but closed below its prior low from September. We may begin to see the formation of “bear flag” chart patterns on the major indices, but that would probably take a few more days to develop. We’ll keep you posted if this occurs.

Analyzing the recent performance of most industry sectors, you will see that many recent breakouts to new highs have failed. One such example is in the Biotech Index ($BTK). Take a look at the daily chart below:

As you can see, the $BTK broke out to a new multi-year high on October 3, but the breakout promptly failed two days later. Not only did the $BTK fall back down to its breakout point, but it quickly dropped to below support of its prior consolidation from the September lows. In doing so, it also fell below its 50-day moving average. When a breakout to new highs fails so quickly, it traps the bulls who bought the breakout. In the process, a lot of overhead supply is created that makes it difficult for the index to recover. Therefore, it is unlikely that the $BTK index, or any other sector that has demonstrated similar price action over the past week, will recover anytime soon. Looking at the longer term weekly chart, you will notice that last week’s bearish action in $BTK also caused the sector to close right on support of its uptrend line that has been in place since the low of April:

Obviously, the Biotech Index is now at a critical “make it or break it” level that will result in a big move in one direction or the other. Numerous other sectors such as Oil and Utilities, both of which were recent market leaders, have similar chart patterns.

Stay alert in the coming week because many sectors and ETFs are at pivotal levels that could result in major volatility expansions. Until stocks prove otherwise, your overall odds of success favor the short side of the market right now. We view any moderate bounce as a low-risk opportunity to sell short rather than buy new long positions. Only a rally above the daily downtrend lines on the major indices would change our bias. We will continue trailing stops to maximize profits on both our IWM short and GLD long positions. GLD closed at a new record high last Friday and is well positioned to move higher in the coming week, especially considering that gold is often considered a “safe haven” in weak markets. As a side note, be aware that quarterly corporate earnings season begins next week, so pay attention to any stocks you have that are reporting earnings.

Today’s Watchlist:

MDY – S&P 400 Midcap Index SPDR

Trigger = below 125.80 or above 127.30 (whichever comes first)
Target = 121.10 (61.8% Fibo retracement from April low to Aug.high)
Stop = 129.75 (above 20 and 50-day MAs)
Shares = 400 or 300 (see notes)

Notes = We are looking to short MDY, as it is breaking down now. We have two possible entry points, either below Friday’s low or a bounce above the high, whichever comes first. If the trigger is the lower price, we will take 300 shares, but the share size will be 400 if the higher trigger price is hit first.

Daily Performance Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:

    Open positions (coming into today):

      GLD long (600 shares remaining from Sept. 7 and 9 entries; sold 200 on Sept. 22) –
      bought 44.59 (avg.), stop 46.52, target new high (trailing a stop), unrealized points = + 2.77, unrealized P/L = + $1,662

      IWM short (250 shares from Oct. 4 entry) –
      shorted 66.43, stop 65.80, target 61.10, unrealized points = + 2.33, unrealized P/L = + $582

    Closed positions (since last report):


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



      We have raised the stop on GLD, but no changes to the IWM stop.

    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