The Wagner Daily

Commentary:

The broad market suffered from a stupendous selloff yesterday morning, but made an equally massive recovery in the afternoon. By day’s end, the major indices had finished near unchanged levels, but the closing percentage changes concealed the wild intraday action that preceded. The S&P 500, for example, was showing a 1.6% loss at its 12:00 noon intraday low, but the index reversed all the way back to finish 0.1% higher, as did the Dow Jones Industrial Average. The Nasdaq Composite closed 0.3% lower, but that was a far cry better than its 2.4% mid-day loss. The small-cap Russell 2000 Index was unchanged, but the S&P Midcap 400 slid another 0.5%.

Turnover across the board surged to monstrous levels yesterday, indicating that institutional program trading was abound. Total volume in the NYSE increased by 39%, while volume in the Nasdaq was a gargantuan 53% higher than the previous day’s level. For the first time in approximately one year, more than three billion shares traded hands in the Nasdaq. You had to look back even further to find the last time that volume in the NYSE exceeded yesterday’s level. Market internals were negative, but improved dramatically as the market rallied in the afternoon. At its worst level, declining volume in the NYSE exceeded advancing volume by more than 12 to 1, but the ratio finished negative by only 3 to 2. The Nasdaq ratio recovered from an unbelievably negative margin of 23 to 1 at its intraday low, yes 23 to 1 (!!), to finish negative by 3 to 1.

The big question on traders’ minds is what to make of yesterday’s action. The bearish argument is that yesterday morning’s selling coincided with breaks of pivotal support levels in the major indices, humongous volume, and the worst market internals in years. However, extreme ratios in the market internals have historically coincided with market bottoms or tops. Additionally, it was bullish that the broad-based indices recovered from the morning’s substantial losses. The intraday price action of a large selloff in the morning and subsequent afternoon rally caused a plethora of bullish “hammer” candlestick patterns to form on the daily charts of many individual stocks and the major indices. But a lot of stocks and indices also broke and closed below key support levels yesterday. A good example of this is the S&P Midcap SPDR (MDY), which mirrors the S&P Midcap 400 Index. Looking at the chart below, notice how MDY closed below both its 200-day moving average and prior closing low from May, but also formed a bullish “hammer” candlestick:

In scanning the market after yesterday’s close, we came across literally hundreds of stocks and ETFs with similar chart patterns to MDY above. Obviously, a formation such as this provides a lot of mixed signals. The amount of overhead supply left behind in the wake of a major break of support always makes it challenging for a stock or index to quickly recover to its prior range. However, the huge surge in volume indicates that institutional trading was definitely at work on both sides of the market yesterday. As we frequently discuss, it is the participation of mutual and hedge funds that moves the markets, so a sudden accumulation of stocks at current levels could generate the momentum necessary for the market to reverse.

We at Morpheus Capital are taking a “wait and see” stance on yesterday’s action. We covered some of our short positions into weakness when they hit or came close to their downside price targets yesterday morning, but still remain net short in our hedge fund. Because we are treating yesterday as a major reversal attempt, we are not planning on entering new short positions unless the market quickly erases yesterday afternoon’s recovery. Conversely, we feel it is unwise to blindly begin buying stocks just because of one session of bullish price action. Therefore, your best bet is to simply focus on managing existing positions and patiently wait to see if the market brings us any upside follow-through. If it does, we are prepared to present you with the strongest ETFs that are likely to lead the market’s advance. Until then, we remain short HALF of our position in the Dow Jones DIAMONDS (DIA), as we covered the first half of our shares for a nice gain near yesterday’s low. We also are long the iShares 20+ year bond index (TLT) and the Euro Currency Trust (FXE), although the latter appears to be failing its breakout and is close to our stop.

Today’s Watchlist:

We freed up some buying power by covering half of our short position in DIA yesterday, but now we are waiting to see the market’s next direction after yesterday’s reversal attempt. As always, we will send an intraday e-mail alert if we enter any new positions not listed here in the pre-market.

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):

stop 111.40

unrealized P/L = + $402

TLT long (320 shares from June 2 entry) –
bought 84.70, stop 83.08, target 89.45, unrealized points = + 0.57, unrealized P/L = + $183

FXE long (240 shares from June 2 entry) –
bought 129.22, stop 126.20, target new high (will trail stop), unrealized points = (2.56), unrealized P/L = ($614)

Closed positions (since last report):

net P/L = + $557

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

$76,760

Notes:

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Edited by Deron Wagner,
MTG Founder and
Head Trader

Deron Wagner

Deron Wagner is a professional trader, author of several ETF trading books, and the Founder of Morpheus Trading Group. Since 2002, he has been sharing his proven swing trading strategy with thousands of traders around the world. He has appeared on CNBC, ABC, and Yahoo! Finance Vision television networks, and is a frequent guest speaker at various global investing conferences.