The Wagner Daily


Stocks followed-through on the previous day’s weakness, as selling in each of the major indices intensified. The broad market gapped down on the open, trended lower throughout most of the day, then bounced off its low in the final two hours of trading. The S&P 500 and Nasdaq Composite both fell 0.9%, as the Dow Jones Industrial Average lost 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices declined 0.8% and 1.2% respectively. The S&P and Dow finished in the bottom 20% of their intraday ranges, while the Nasdaq and Russell closed just below the middle of their ranges.

Turnover was mixed. Total volume in the NYSE increased 2% over the previous day’s level, causing the S&P to register its second consecutive “distribution day.” Thanks to 4% lighter volume, however, the Nasdaq dodged that label. Still, the uptick in NYSE volume was modest, not indicative of a mass institutional exodus towards the exit doors. Traders may not have been heavily dumping shares of stock, but firmly negative market internals also pointed to a complete lack of buying interest. Declining volume in the NYSE trounced advancing volume by a margin of 6 to 1. The Nasdaq ratio was negative by just over 3 to 1.

Continued relative weakness in the utilities sector enabled our short position in the Utilities HOLDR (UTH) to hit our downside profit target yesterday. We entered the short position on June 5 when UTH gapped down below its 50-day MA, after failing to hold above it for more than a few days. At the time of entry, we informed subscribers it was only a short-term momentum trade with an anticipated time horizon of 1 to 3 days. Our price target was merely a probe below the May 25 low. We covered the short position about fifty cents above the original price target, but still netted a gain of 3.1 points on the two-day trade. UTH subsequently hit our actual price target about thirty minutes later.

Although prior lows act as price support on corrections, stocks and ETFs will usually dip below those intraday lows, running all the protective stops in a “stop hunt,” before stabilizing and perhaps heading back up. That’s why it is important to always give your trades some “wiggle room” above or below obvious levels of support or resistance. If your stops are too tight at such pivotal levels, you will continually be getting stopped out, only to watch the trade reverse in the proper direction a few hours later. An understanding of the commonplace “stop hunts” is also the reason we typically set downside price targets (for short sales) just below a support level, rather than at the actual support level. Likewise, upside price targets for long positions can be set just above a prior high, rather than at the prior high. With the UTH trade we closed yesterday, our downside price target was $143.20. The prior low from May 25 was $144.38, so our target was a little more than a point below that support level. On a lower-priced ETF, we would only expect it to probe 25 to 50 cents below the support level, but UTH is both higher priced and more volatile that other ETFs. On the daily chart below, the blue horizontal line marks our original price target we assigned upon entering the short sale on June 5. As you can see, UTH traded through that level intraday, but closed just above it:

Yesterday’s broad-based losses caused both the S&P 500 and Dow Jones Industrials to close at critical “make it or break it” support levels. Both indices probed below support of their 20-day exponential moving averages on an intraday basis, then closed right on those levels. Furthermore, the S&P also finished just below lower channel support of its primary uptrend from the March lows:

Like the S&P, the Dow also concluded yesterday’s session by closing right on its 20-day EMA. For now, the index is still clinging to the lower channel support of its 3-month uptrend, but just a minimum of selling pressure in today’s session would cause a violation of the uptrend line:

Just a quick glance at the S&P and Dow charts above illustrates why we said these indexes are at a “make it or break it” level. If the market flexes it muscles today, it would rescue the S&P and Dow from falling over the chasm of their 20-day EMAs. It would also enable both indexes to retain support of their uptrending channels. However, just a modest close below yesterday’s lows could trigger a high-momentum wave of selling that could lead to an intermediate-term correction. If that occurs, the 50-day MAs would represent the next major areas of support for the S&P and Dow.

Obviously, there is not enough confirmation of a technical breakdown to aggressively begin putting on short positions, but it wouldn’t hurt to “dip a toe in the water” on the short side of the market. Long setups are not totally dead yet, so it’s wise to have at least one or two long positions to balance any new short positions you enter in the coming days. Yesterday, we bought a small position of the UltraShort Dow 30 ProShares (DXD), which is akin to selling short the Dow, with 2 to 1 leverage. We also initiated a short position in the iShares Austria Index (EWO). Nevertheless, we still have one long position, AND are stalking three others for potential buy entry. With the market at a pivotal level, it’s probably a good idea for be balanced on both sides of the market. When stocks confirm the direction of their next intermediate-term move, the positions on the opposing side of the market can quickly be closed. Both our short and intermediate-term biases have shifted from bullish to neutral, while the long-term bias remains bullish.

Today’s Watchlist:

SLV – iShares Silver Trust

Shares = 100
Trigger = 137.52 (above the high of the recent consolidation)
Stop = 133.28 (below the prior downtrend line and 50-day MA)
Target = 147.80 (probe above Feb. 26 high)
Dividend Date = n/a

Notes = As discussed a few days ago, we like the recent consolidation in both gold and silver, but silver has a better chart pattern and is showing more relative strength. As you can see, SLV broke out above its daily downtrend line on June 1, then pulled back to test support of that prior downtrend line yesterday. SLV held up well and closed near its intraday high. A rally above the high of the short-term consolidation should confirm the strength and send SLV much higher.

PBW – PowerShares WilderHill Clean Energy

Shares = 500
Trigger = 20.24 (above the high of the consolidation)
Stop = 19.52 (below the recent consolidation and 20-day EMA)
Target = new high (will trail stop)
Dividend Date = June 15, 2007

Notes = This setup from yesterday did not yet trigger, but remains on our watchlist for potential entry today. See commentary in the June 6 issue of The Wagner Daily for complete explanation of the setup. GEX is also on our watchlist, though it needs to consolidate or pullback first.

DBC – DB Commodity Index Tracking Fund

Shares = 400
Trigger = 26.07 (above the high of the consolidation)
Stop = 25.18 (below convergence of 20 and 50-day moving averages)
Target = new high (will trail stop)
Dividend Date = n/a

Notes = This setup from June 5 did not yet trigger, but remains on our watchlist for potential entry today. See commentary in the June 5 issue of The Wagner Daily for complete explanation of the setup. Basically, this setup is a breakout above consolidation.

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):

      EWO short (300 shares from June 6 entry) – sold short 40.77, stop 42.04, target 37.75, unrealized points = + 0.27 unrealized P/L = + $81

      DXD long (250 shares from June 6 entry) – bought 50.00, stop 48.68, target 53.18, unrealized points = + 0.25 unrealized P/L = + $63

      FBT long (600 shares from May 31 entry) – bought 25.74, stop – see notes below, target new high (will trail stop), unrealized points = (0.60), unrealized P/L = ($360)

    Closed positions (since last report):

      UTH short (200 shares from June 5 entry) – sold short 146.84, covered 143.70, points = + 3.14 unrealized P/L = + $624

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



      Per intraday e-mail alert, we covered the UTH short position just above its original price target, locking in a gain of more than 3 points. We also entered two new positions: EWO short and DXD long.

      As for FBT, we gave it a few more cents of “wiggle room” yesterday because the 50-day MA had risen up to near the area of our stop price. Since FBT closed just a few pennies above our stop, the initial stop price going into today will be 5 cents below the low of the first 20 minutes OR 25.12, whichever is lower. We are managing it this way rather than using a firm stop because our plan is to minimize the loss by selling FBT into a morning bounce. If it suddenly begins acting strong enough to potentially reverse back up to the high, we will “wait and see” and maintain the position. Conversely, we will close the position promptly if it violates yesterday’s low by more than a few cents. We’ll keep you informed of our FBT position management via intraday e-mail alerts.

    Please check out the Wagner Daily Subscriber Guide to learn how to get the most from your subscription.

    Edited by Deron Wagner,
    MTG Founder and
    Head Trader