The Wagner Daily


Stocks posted another day of mixed results yesterday, as the Dow again led the broad market while the Nasdaq lagged. The Dow Jones Industrial Average gained 0.2%, squeaking by just enough to register a new all-time closing high. The S&P 500 similarly eked out a gain of 0.1%, but the Nasdaq Composite lost 0.2%. The small-cap Russell 2000 Index continued to show relative weakness by sliding 0.6%. The S&P Midcap 400 was off by 0.1%. After spending most of the day in a sideways range, the major indices briefly rallied one hour before the close, but the gains just as quickly eroded in the final thirty minutes of trading. Most of the major stock market indexes finished near the middle of their intraday ranges. The laggard Russell 2000 closed in the bottom quarter of its range.

Yesterday’s mixed price action might have seemed okay on the surface, but the volume and market internals told a different story. Total volume in the NYSE was 2% higher than the previous day’s level, while volume in the Nasdaq increased by 5%. The Nasdaq’s loss on higher volume caused the index to register a moderate “distribution day.” Rather than scoring a bullish “accumulation day,” the action in the S&P is best described as bearish “churning.” This occurs when volume ticks higher without a significant corresponding increase in prices. In yesterday morning’s newsletter, we said, “The Nasdaq has had three days of gains and two days of losses within the past five sessions, but all three of the winning days were on declining volume, while both of the losing days were on higher volume.” To that unimpressive tally, we must now add another day of higher volume losses. The market internals confirmed yesterday’s underlying weakness. Despite the advances in the Dow and S&P, declining volume in the NYSE marginally exceeded advancing volume. The ratio in the Nasdaq was flat. In both exchanges, declining issues exceeded advancing issues by a nominal amount.

Although it closed at a new 52-week the previous day, the Internet HOLDR (HHH) fell apart yesterday. Its 4.2% drop was the biggest loss of all the ETFs in the market. The culprit, as you might have surmised, was Yahoo’s (YHOO) post-earnings plunge of 11.7%. Yesterday, we cautioned that, “technical analysis usually means very little when there is a major shock to the system such as a keystone company either blowing away or completely missing their earnings expectations.” The rapid reversal in the trend of HHH was a perfect example of why we always reduce the number of positions we take during earnings season. At this time in every calendar quarter, putting on new trades is a lot like dodging land mines:

In the April 17 issue of The Wagner Daily, we discussed the importance of making sure ETFs that broke out to new highs were preceded by lengthy periods of consolidation, as opposed to ones that zoomed to new highs without first forming a base of support. As you can see on the chart above, HHH lacked a proper base of consolidation when it gapped up to a new high. When this occurs, the bearish reversals tend to be just as swift. Obviously, YHOO was the primary reason that HHH gapped down below support of both its intermediate-term uptrend line and 20-day exponential moving average. However, if the other stocks that comprise the ETF would have been in bullish consolidation patterns, both those stocks and HHH would have held up better yesterday.

If a key software company misses its earnings forecast over the next several days, it would clearly have a negative impact on the price of the iShares Software Index (IGV). But the difference between HHH and IGV is that the latter just broke out from a five-month base of consolidation. This would help to limit the loss of IGV in the event of a substantial drop in any individual stock. IGV pulled back modestly yesterday, but still held firmly above support of its prior consolidation:

When the U.S. market suffered its massive drop on February 27, prior overnight weakness in the Shanghai market was arguably the primary impetus that triggered the whole thing. As you may recall, the Chinese market had fallen more than 9% that day, which subsequently led to large opening gap downs in the S&P, Dow, and Nasdaq. Bearish momentum from the gap downs continued throughout the session, until each index had suffered losses of more than 3% by the closing bell. As I write this early Thursday morning, the Shanghai market is showing an intraday loss of nearly 5%. So, what about the S&P and Nasdaq futures? You guessed it, deja vu! Both are already showing losses of 0.7% from yesterday’s close, and it wasn’t the result of negative after-hours earnings reports. Is it my imagination or is the Shanghai market perhaps becoming a leading indicator of the action in the U.S. markets? If that observation is correct, it would certainly be major change from all the other world markets following the daily sentiment of the U.S. markets.

While weakness in the Shanghai market is going to have a negative bearing on today’s domestic open, the continued deluge of corporate earnings reports will throw even more volatility into the mix. If the major indices start to break down intraday, watch both the 20-day exponential moving averages and 50-day simple moving averages as likely areas of price support. You may want to review yesterday’s commentary for a quick snapshot and technical status of the S&P, Dow, and Nasdaq. How well the major indices hold up on a test of these levels will tell us a lot about whether this is just a normal correction from “overbought” conditions, or perhaps the start of something similar to what we saw in late February and early March. Either way, it’s likely to be a volatile day, so stay alert and be sure to honor your stops!

Today’s Watchlist:

There are no new pre-market setups for today, but we will send an intraday e-mail alert if/when we enter anything new. With a potential shift in the short-term trend of the markets, we think it is wise to “wait and see” what happens from here. Like we said yesterday, we have shifted into a more defensive mode and want to “cherry pick” only the best setups. Cash seems to be the best position right now.

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):

      GLD long (400 shares from March 28 entry) – bought 66.15, stop 66.34, target new high (will trail stop), unrealized points = + 2.23, unrealized P/L = + $892

      IYR short (275 shares from March 13 entry) – sold short 85.75, stop 87.79, target 78.30, unrealized points = (1.13), unrealized P/L = ($311)

    Closed positions (since last report):


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



      No changes to the open positions.

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    Edited by Deron Wagner,
    MTG Founder and
    Head Trader