The Wagner Daily


After drifting lower throughout most of the session, the broad market reversed off its intraday lows in the final hour of trading, but the major indices still closed modestly lower. The S&P 500, which bounced off support of its May 1 low, lost 0.4%. The Nasdaq Composite fared better this time and dropped only 0.3%, while the small-cap Russell 2000 showed even more relative strength by finishing unchanged. Both the Dow Jones Industrials and the S&P Midcap 400 indices lost 0.1%. Each of the major indices finished near the middle of their intraday ranges, indicating a mixed bias into the close.

Total volume in the NYSE increased by 1% yesterday, while volume in the Nasdaq was 3% higher than the previous day’s level. Market internals were negative, but not a wide margin. In both exchanges, declining volume exceeded advancing volume by a ratio of just over 3 to 2. Although turnover only rose by a nominal amount yesterday, it was technically enough to result in the registration of bearish “distribution days” in both exchanges. It was the fourth day of institutional selling in both exchanges within the past four weeks, a quantity of “distribution days” that is high enough to warrant vigilance on the long side of the market. Like we mentioned several days ago, the abundance of days in which volume has exceeded average levels in recent weeks is indicative of “churning” because the broad market has failed to make significant price advances alongside of the increased turnover.

The two sector ETFs we have been stalking over the past several days, the Regional Bank HOLDR (RKH) and the Utilities HOLDR (UTH), both showed relative strength to the broad market yesterday. UTH slid 0.3%, but it perfectly bounced off support of its prior downtrend line. The most basic tenet of technical analysis states that a prior resistance level becomes the new support level after that resistance is broken. As a good example of this, notice how yesterday’s low in UTH perfectly coincided with support of the prior downtrend line that it broke out above on May 2:

Because UTH did not yet trade above its 200-day moving average, our trade setup to buy it did not yet trigger. However, regular subscribers will see that it remains on our watchlist going into today. Assuming the broad market holds up okay, there is a good possibility the sector will break out above the May 2 high within the next day or two.

Since breaking out to a new high on April 27, we have been stalking RKH for a potential long entry, but were waiting for it to settle into an area of support. Because the trading range of the past two days has been rather tight and in the upper half of the breakout’s range, we consider this to be bullish. As such, we anticipate a continuation of the breakout over the next one to two weeks. RKH opened nearly unchanged, drifted lower throughout the day, but recovered to close near its intraday high yesterday. This action caused a “hammer” candlestick to form on its daily chart, a bullish pattern that should lead to further upside over the next several days. Looking at the shorter-term hourly chart of RKH, notice how the retracement from the high to the low of the breakout has been less than 50%. This is a good sign because breakouts that retrace less than 50% of their move are more likely to resume the upward momentum. For a relatively “safe” entry, you might consider buying RKH about 30 to 40 cents over yesterday’s high:

On the downside, advanced traders might consider selling short the Oil Index ($XOI), as it appears to be forming a “lower high” on its daily chart. Note, however, that the Oil Service Index ($OSX) is showing much more relative strength than the $XOI, which is comprised of oil refiners and producers instead. We sold short XLE (S&P Select Energy SPDR) yesterday when it fell below its prior day’s low, but we do not recommend shorting the Oil Service HOLDR (OIH). Novice traders may wish to pass on this trade idea because the oil-related shares often move rapidly and gap a lot due to overnight changes in the price of crude. Also, because the $XOI index is still near its all-time high, being able to quickly cut the loss on a breakout to a new high is crucial.

One sector that has been stuck in a very narrow trading range over the past two weeks is the Semiconductor Index ($SOX). Because the $SOX is so heavily weighted within the Nasdaq, its direction tends to lead the Nasdaq, and often the entire broad market. The fact that the $SOX has not gone anywhere recently is certainly one of the reasons why the major indices just continue to chop around in no particular direction. The good news, however, is that we are likely to see a volatility expansion in the $SOX within the next several days. The daily chart of the $SOX shows how the channel has been narrowing around the $SOX during its volatility contraction. Along with the tightening of the channel, convergence of the 20 and 50-day moving averages should also force the $SOX to soon show its hand:

It’s difficult to speculate which direction the $SOX will actually go, so just be prepared for a swift move in either direction. The bullish side of the argument is that the S&P and Dow remain near multi-year highs and could easily break out, but the bearish argument is that the Nasdaq could break support and roll over at any moment. In each of the past three days, the Nasdaq has closed below its 50-day moving average, but has closed above its prior low at the 2,300 level. Continue watching the Nasdaq Composite closely, as it is sitting at a “make it or break it” inflection point that could move the whole broad market in either direction.

Today’s Watchlist:

UTH – Utilities HOLDR

Trigger = above 114.78 (over the May 2 high and the 200-MA)
Target = 119.95 (just below the high of January 25)
Stop = 112.45 (below support of prior downtrend line and 50-MA)
Shares = 200

Notes = UTH did not trigger yesterday, but it remains on our watchlist for potential entry today. Note the new trigger price and reduced share size. Consult yesterday’s Wagner Daily for detailed explanation of the trade setup.

RKH – Regional Bank HOLDR

Trigger = above 153.68 (over the two-day high)
Target = new high (will trail stop)
Stop = 150.65
Shares = 100

Notes = Due to new highs and relative strength in the Banking Index ($BKX), we are now stalking RKH for a potential long entry on this correction. Our new trigger price is just over the two-day high, which would also break the short-term hourly downtrend and should lead to resumption of the breakout.

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):

      IYR short (400 shares from April 24 entry) –
      sold short 71.04, stop 71.77, target 67.10, unrealized points = + 1.53, unrealized P/L = + $612

      XLE short (400 shares from May 3 entry) –
      sold short 58.66, stop 59.95, target 54.05, unrealized points = + 0.21, unrealized P/L = + $84

    Closed positions (since last report):


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



      Per intraday e-mail alert, we sold short XLE yesterday. We also canceled the setup in RKH yesterday, but we like the way it held support and closed at the high yesterday. As such, it is back on our watchlist for potential entry today. UTH did not trigger yesterday, but remains on the watchlist as well. Finally, note the new trigger prices and reduced shares size on both RKH and UTH.

    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