The Wagner Daily


Stocks traded in an uneventful, sideways range throughout yesterday’s session before finishing the day modestly higher. The S&P 500 gained 0.4%, the Nasdaq Composite 0.3%, and the Dow Jones Industrial Average 0.2%. Small and mid-cap stocks outperformed, enabling the Russell 2000 and S&P Midcap 400 indices to rally 1.0% and 0.7% respectively. A bounce in the final fifteen minutes of trading caused the Russell to close at its intraday high, but all the other indices settled just above the middle of their intraday ranges.

Though the major indices built on their gains from the previous day’s reversal, significantly lighter volume indicated a lack of institutional buying interest. Total volume in the NYSE declined by 28%, while volume in the Nasdaq was 22% lower than the previous day’s level. In both exchanges, turnover fell below 50-day average levels. The 1.8 billion shares that exchanged hands in the Nasdaq was the second lightest day of the year. Higher volume would have indicated a growing appetite for stocks by mutual funds, hedge funds, and other institutions, but they remained on the sidelines instead. The S&P has had seven “up” days since its February 22 peak, but only one of those sessions occurred on higher volume. Until we begin to see clear signs of institutional accumulation, as determined by studying the market’s daily price to volume ratio, buying stocks remains a risky proposition.

Yesterday, we compared a few similarities of the May – July 2006 correction with the broad market’s current correction. If the market continues to unfold in a similar fashion, we should soon expect the 20-day moving averages of the S&P, Nasdaq, and Dow to act as resistance to push these indices back down to test their lows. Below are two daily charts of the S&P 500. The first one highlights how a rally into the 20-day MA in early June triggered a resumption of the downtrend that began the previous month. The second chart is a current snapshot that shows how the 20-day MA is quickly approaching the price of the S&P:

Like the S&P, the Nasdaq also resumed its downtrend after running into its 20-day MA last June. This eventually led to two more “lower lows” over the next two months. Below is a chart of the Nasdaq from last May – July, followed by a current snapshot of the index:

When a market has reversed its intermediate-term trend, we like to watch for confirmation of the 20-day moving average to cross below the 50-day MA. Looking at the charts above, you will see this occurred quickly in last year’s correction, and has done the same this time as well. After their 20-day MAs initially crossed below their 50-day MAs last May, it took the S&P 500 eight days and the Nasdaq twelve days to rally back into their respective 20-day MAs. A subsequent test of the 50-day MAs did not come until July, near the end of their downtrends. The correction that began in May of 2006 lasted for three months, a typical period of a “healthy” correction. As mentioned before, it usually takes at least one to two months for the market to recover from a sharp sell-off like the one experienced on February 27.

Although the descending 20-day moving averages are soon likely to trigger another selling spree, we don’t know whether the major indices will rally up to their 20-day MAs or if they will simply “correct by time” and trade sideways until the 20-day MAs descend further. There is also the possibility, of course, that stocks will move back down to test their lows before the 20-day MAs converge with the prices of the S&P, Nasdaq, and Dow. Considering that the broad market attempted to build a short-term bottom with the March 14 reversal, a rapid move back down to that day’s intraday low would be rather bearish.

Remember that today is “triple witching” options expiration day. Once per quarter, the institutional manipulation of stocks to move closer to their “strike prices” typically results in increased volatility, higher volume, and erratic intraday price action. If it’s not enough fun that the major indices are stuck in the middle of this week’s trading ranges, we can look forward to the probability of whippy price action to close the week. Buckle up and ride out the volatility because there is a good chance we will see resumption of the intermediate-term downtrend next week. But as always, obey your protective stops.

Today’s Watchlist:

There are no new setups for today, as we are near the maximum buying power of the $50,000 model account. Instead, we will focus on micromanaging open positions for maximum profitability.

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):

      SDS long (400 shares – 300 from March 1 entry , 100 added on March 7) –
      bought 60.51 (avg.), stop 59.78, target 64.18, unrealized points = + 0.51, unrealized P/L = + $204

      IYR short (275 shares from March 13 entry) – sold short 85.75, stop 88.69, target 78.30, unrealized points = (0.19), unrealized P/L = ($52)

      TWM long (250 shares from March 7 entry) – bought 71.94, stop 69.35, target 78.18, unrealized points = (1.33), unrealized P/L = ($333)

      UTH short (200 shares – 100 from March 5 entry, 100 added on March 9) –
      sold short 133.62 (avg.), stop 136.59, target 125.10, unrealized points = (2.28), unrealized P/L = ($456)

    Closed positions (since last report):


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



      Regarding TWM, the Russell 2000 Index has retraced more than the other major indices, but is still below both its “swing high” from March 12, and its 20/50 day MAs. As such, we have moved the stop back to its original price of 69.35 in order to provide for a bit of “wiggle room” that may be required to ride out today’s “triple witching” options expiration day. Recall that 69.35 was our original stop, but we raised it after TWM rallied on March 13. Note that we are not taking additional risk, but simply moving the stop back to our original capital risk. We will tighten it again as we are able.

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    Edited by Deron Wagner,
    MTG Founder and
    Head Trader