The Wagner Daily


Stocks began the week with a rather uneventful session, as the major indices meandered in a lethargic, sideways range throughout the entire session. The Dow Jones Industrial Average gained 0.1%, but the S&P 500 closed lower by the same percentage. The Nasdaq Composite was unchanged. Relative weakness was found in the small and mid-cap sectors, both of which typically lead the broad market. The Russell 2000 fell 0.5% and the S&P Midcap 400 slid 0.7%, the latter of which caused our short position in the S&P Midcap SPDR (MDY) to near its original profit target of the June 14 low. The trade is presently showing a marked to market gain of more than 5 points and we have tightened our stop to protect the profit. Regular subscribers should note the updated stop price below today’s commentary.

Total volume in the NYSE declined by 13% yesterday, while volume in the Nasdaq came in 14% below the previous day’s level. Considering the minimal price action in the broad market, it’s not surprising that turnover was lower as well. As one might expect from a session in which the major indices were nearly unchanged, market internals were basically neutral. Declining volume was marginally higher than advancing volume in the NYSE, but the Nasdaq internals finished in parity.

Gold and oil futures contracts sold off sharply yesterday, as did the stocks that comprise the sectors. The Gold and Silver Sector Index ($XAU) declined 3.4%, while the Oil Service Index ($OSX) lost a whopping 4.4%. Aside from those two sectors, all the other industries we follow closed within 1% of the flat line. Telecom and Internet stocks rallied a bit and Biotech stocks showed weakness, but it was a pretty boring and uneventful day overall.

As you may recall, we suggested avoiding the oil related stocks and ETFs before the market opened yesterday due to the recent abundance of news out of the Middle East. Although one might have anticipated higher prices in the face of the Middle East turmoil, it’s dangerous to predict the market’s reaction to news events. By the time the general public gets the idea to buy a sector or stock, it’s usually too late because it’s too obvious. In this situation, it appears that institutions sold into strength of oil’s recent rally because they had already bought stocks at much lower levels. Basing your trading decisions purely on news events is always a risky proposition because the stock market rarely reacts as one might expect it would. Conversely, relying on technical analysis enables you to remove the “mental clutter” generated from the talking heads you see on TV every day.

Several of the fixed-income (bond) ETFs have begun to show strength. The fixed-income family of ETFs from iShares enables traders and investors to take long positions in ETFs that may offer less risk of depreciation if the stock market continues to drop. We like that the bond ETFs are not directly correlated to the price action in the stock market. As an added bonus to those who hold them long-term, dividends are paid out just the same as if you bought an actual bond. Of all the bond ETFs, we feel the best chart pattern right now is in the iShares Corporate Bond Fund (LQD). As the chart below illustrates, LQD has been in a steady downtrend for a long time, but it has begun to break out above resistance of its secondary downtrend line that has been in place since January of 2006:

Although the weekly chart is pictured above, a glance at the daily chart will show you that LQD is also testing overhead resistance of its 50-day moving average. The 50-day MA has acted as resistance on several occasions when LQD attempted to rally over the past year, but we are watching for a potential breakout this time, as a “flight to safety” may begin generating more interest in bonds. Subscribers will see that we are stalking LQD for a new potential long entry if it trades above our trigger price. For a list of the other bond ETFs and links to descriptions of them, download the free Morpheus ETF Roundup.

The focal point for the broad market as we enter today remains support of the prior lows from June 14 for both the S&P 500 and Dow Jones Industrials. If those levels hold, it could result in at least a short-term bounce off a double bottom. But keep in mind that the Nasdaq has already been trading below its June low for the past three sessions. The longer it remains below that level, the more difficult it will be to recover back above it. For now, the Nasdaq is weighing on the other indices and could easily cause both the S&P and Dow to break down to new lows as well. If you’re short, don’t be complacent with your positions. Keep trailing your protective stops tighter and be on guard for a reversal out of nowhere (which is when they usually happen). Downtrending stocks and ETFs often snap back hard. As for long entries, we don’t see a single equity-based ETF that shows a strong pattern worthy of buying for anything more than a one to two day bounce. Instead, we are waiting for the sector ETFs that have recently broken down to bounce into their new resistance levels. When they do, we’ll be ready to enter new short positions.

Today’s Watchlist:

LQD – iShares Corp. Bond Fund

Trigger = above 104.02 (above 50-day MA and July 14 high)
Target = 106.20 (probe above 200-day MA resistance)
Stop = 102.85 (below support of 20-day MA)
Shares = 400

Notes = We will buy LQD on a confirmed breakout above its 50-day moving average, which should occur with a break of the July 14 high. Note that LQD is not very volatile and ties up a lot of buying power. Therefore, traders with small accounts may consider passing on this ETF setup.

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):

      MDY short (200 shares from July 7 and 10 entries) –
      sold short 137.69 (avg.), stop 133.65, target 130.40, unrealized points = + 5.65, unrealized P/L = + $1,130

    Closed positions (since last report):


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



      Due to the fact that MDY is in the area of prior price support, we are now using a tight stop just above yesterday’s high. We will close the position when it hits our target or the trailing stop, whichever comes first.

    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