The Wagner Daily


The major indices failed to recover from last Friday’s destruction in a meaningful way, as the broad market closed marginally higher and on lighter volume. After trading in a tight and narrow sideways range throughout the entire day, the S&P 500 and Dow Jones Industrial Average both finished 0.2% higher. The Nasdaq Composite gained less than 0.1%, but the small-cap Russell 2000 bounced 0.5%. The mid-cap S&P 400 gained 0.3%. Each of the major indices closed in the middle of their narrow intraday ranges, but still near the bottom of last Friday’s ranges. This, of course, does not bode well for positive price action going into today’s session.

Although stocks closed a bit higher yesterday, the negative is that they did so on lighter volume. Total volume in the NYSE receded by 20%, while volume in the Nasdaq was 18% lower than the previous day’s level. A bounce on higher volume yesterday would have indicated that institutions were taking advantage of buying weakness after last Friday’s pummeling, but that was not the case. Instead, the sharp drop in volume merely indicated the bears took a break from their selling. Because institutions failed to provide support yesterday, it would not be surprising to see another slide in today’s session.

Many ETFs are now beginning to present themselves as good entries for new short positions. Overall, we generally prefer to short industry sector ETFs with relative weakness instead of broad-based ETFs because they are less likely to reverse if the broad market does. One sector ETF we like on the short side is RTH (Retail HOLDR), which we shorted per the full version of yesterday’s Wagner Daily. Below is a daily chart of RTH:

We like that RTH has been in a technical downtrend since mid-November, which is always better than trying to short an ETF that is near a 52-week high. On January 20, RTH closed below its January 5 close and on higher volume, indicating a likely resumption of the downtrend. More importantly, RTH had dropped back below its 200-day moving average, which should now act as major overhead resistance. We shorted RTH yesterday when it broke the January 20 low, and the trade is currently showing a small unrealized gain. From here, we anticipate a test of the October 2005 lows, although we have our protective stop in place just above the January 20 high. IYC (iShares Retail) and PMR (PowerShares Retail) are two alternative ETFs to consider if your broker has trouble locating shares of RTH to borrow for short selling. Remember you can always call your broker to request a “locate” for hard-to-borrow shares of ETFs such as RTH (or change to a broker with a wider list of easy-to-borrow shares).

As for the broad market, we would consider shorting just about every broad-based ETF on a violation of its two-day low. QQQQ is one of the better looking ones because it has already been trading below its 50-day MA for the past two days. SPY also looks pretty good for a quick short-side trade if it breaks its January 20 low. DIA could be a little more tricky to short because of the close proximity of its 200-day MA just below. Although they may correct as well, both MDY and IWM are best avoided on the short side due to their recent relative strength and lack of overhead supply.

As discussed in yesterday’s Wagner Daily, last Friday’s bearish price action caused us to shift our overall short-term market bias to the bearish side. The fact that both the S&P and Nasdaq failed to quickly show clear signs of reversing off their 50-day moving averages is not good. Many professional traders saw last Friday’s large percentage losses combined with the huge volume spikes as a major red flag, so they are not excited about stepping in and buying just because of the moving average support. As such, it would only require a small amount of selling pressure in today’s session to cause the major indices to fall below their respective lows of the past two days. If that occurs, a bearish chain reaction of events could cause another strong wave of selling. Of course, this is just one possible scenario, but it is one that wise traders should be prepared for. Being prepared for this scenario could prevent you from getting stuck with large losses if we see a repeat of last Friday’s action.

Today’s Watchlist:

QQQQ – Nasdaq 100 Index

Trigger = below 40.95 (below yesterday’s low)
Target = 38.90 (support of 200-day MA)
Stop = 42.15 (above 20-day MA)
Shares = 400

Notes = Per the commentary above, we like QQQQ on a break below the two-day low, as it now has a lot of overhead supply an downside momentum building up.

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):

      RTH short (400 shares from Jan. 23 entry) –
      shorted 94.76, stop 96.25, target 89.80, unrealized points = + 0.76, unrealized P/L = + $304

      PPH long (350 shares remaining – from Jan. 3 and Jan. 19 entries) –
      bought 70.99 (avg.), stop 70.80, target 73.45, unrealized points = + 0.37, unrealized P/L = + $130

      PGJ long (1000 shares from Jan. 19 entry) –
      bought 15.30, stop 14.65, target new highs (will trail stop), unrealized points = (0.05), unrealized P/L = ($50)

    Closed positions (since last report):


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



      Per intraday e-mail alert, we shorted RTH into the bounce yesterday morning instead of the original trigger price. No changes to any stops.

    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