The Wagner Daily


A break of key technical support levels in the major indices triggered the third straight day of broad-based losses yesterday. A surge in turnover hinted at aggressive underlying selling on the part of mutual funds, hedge funds, and other institutional traders. The S&P 500 and Nasdaq Composite suffered identical losses of 1.8%, while the Dow Jones Industrial Average closed 1.5% lower. The S&P Midcap 400, which was showing impressive relative strength just a few days ago, plummeted 2.1%. The small-cap Russell 2000 similarly swooned 1.9%. Like the previous day, stocks attempted to move off their lows in the final ninety minutes of trading, but the bounce didn’t hold this time. Each of the major indices finished at their dead lows.

Volume in both exchanges zoomed higher, causing both the S&P and Nasdaq to register another bearish “distribution day.” Total volume in the NYSE spiked 23%, to its highest level of the past six weeks. Such an increase in turnover made the institutional selling pretty obvious, but it was actually the third straight “distribution day” for the S&P, and its fourth in recent weeks. Volume in the Nasdaq increased 13% over the previous day’s level, generating the seventh “distribution day” of the past three weeks. Price action is sometimes deceiving, but volume is one indicator that never lies! Swift changes in volume levels that correlate with volatile price movements are the footprints of institutional buying and selling. Since institutional activity accounts for more than half of the market’s volume on an average day, a daily analysis of the relationship between the market’s price and volume is essential for knowing what is really happening “under the hood” of the market. Extremely bearish market internals confirmed the heavy selling. Declining volume in the NYSE crushed advancing volume by a ratio of nearly 17 to 1! This coincided with only 1 advancing issue for every 10 declining issues in yesterday’s session, giving just a 10% chance that any stock managed to eke out a gain. The ratios were just plain ugly. The Nasdaq internals were slightly better, but still pretty negative.

Every major industry sector on our watchlist closed in the red yesterday, so there were no upside standout performances to speak of. Only the Oil Index ($XOI) and Banking Index ($BKX) “outperformed” the major indices by losing less than 1.5%. Still, $XOI lost 1.4% and $BKX slid 1.3% — hardly anything to write home about. On the downside, one did not have to look very hard to find the biggest leaders. Six sectors we monitor fell more than 3%. They were: Biotech ($BTK), Real Estate ($DJR), Utilities ($DJU), Gold and Silver ($XAU), Metals and Mining ($SPSIMM), and U.S. Home Construction ($DJUSHB).

The big drop in the Utilities sector caused the Utilities HOLDR (UTH) to surrender another 5 points yesterday. Even though we closed our UTH short position on June 6, we were not upset that it fell so much more yesterday. Upon selling short UTH on June 5, we had a predetermined stop and target price. It hit the target price the following day, so we simply stuck to our plan and covered the position for a respectable 3-point gain. Professional traders generate consistent long-term profits by following their plans, not by acting in hindsight. Nevertheless, we were indeed a bit surprised by the extreme weakness the sector continued to show. The same could be said for the Biotech sector, as the $BTK plunged through its 50-day MA without even attempting to hold support of its consolidation.

The selling in the Biotech arena caused our long position in the First Trust Biotech (FBT) to stop out shortly after the open. However, our two remaining open positions, both of which were opened on June 6, moved deeper into the plus column. The inversely correlated UltraShort Dow 30 ProShares (DXD) rallied 3.0%, twice the percentage loss of the Dow Jones Industrial Average, and is presently showing a gain of 3.6% since our entry. Like DXD, our short position in iShares Austria Index (EWO) also gained 3.0% yesterday. We have trailed the stops tighter on both positions as they continue to close in on their target prices. DBC triggered to the long side yesterday, but SLV and PBW long setups have been removed from our watchlist.

In yesterday’s Wagner Daily, we said that the S&P and Dow were both at critical “make it or break it” levels that would lead to high volatility in either direction. The convergence of major support levels that both indexes closed at on Wednesday left little choice but for stocks to either “flex their muscles” and maintain their uptrends, or sell off swiftly and break down below their uptrending channels and 20-day EMAs. Obviously, the latter occurred. Not only that, but the S&P fell so rapidly that it is already nearing support of its 50-day MA:

As you can see, the S&P 500 definitively broke down below both its uptrending channel and its 20-day EMA. Both of those levels will now act as overhead resistance on any rally attempt. Notice that the S&P also closed less than three points above its 50-day MA, so expect a test of that major support level today. Historically, the 50-day moving average is the level at which institutions look to buy stocks that are pulling back, but it will be interesting to see if the same occurs in the S&P. With the index moving down to its 50-day MA so rapidly, traders may take a “wait and see” approach to see how the S&P behaves near this key area of support.

As for the other major stock market indexes, the Dow, Nasdaq, Russell, and S&P Midcap indices each broke down below their 20-day EMAs as well. The Russell closed right on its 50-day MA, which bears watching, while the Dow remains 1.3% above its 50-day MA. With all of the indexes trading firmly below their 20-day EMAs and nearing their 50-day MAs, our intermediate-term bias has shifted from neutral to moderately bearish. The short-term bias remains neutral because stocks could easily attempt to retrace some of their recent losses over the next few days. The long-term bias, of course, remains bullish.

Today’s Watchlist:

There are no new setups in the pre-market today. As always, we will send an intraday e-mail alert if we enter anything new.

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 41.13, target 37.75, unrealized points = + 1.49, unrealized P/L = + $447

      DXD long (250 shares from June 6 entry) – bought 50.00, stop 49.59, target 53.18, unrealized points = + 1.78, unrealized P/L = + $445

      DBC long (400 shares from June 7 entry) – bought 26.07, stop 25.18, target new high (will trail stop), unrealized points = (0.13), unrealized P/L = ($52)

    Closed positions (since last report):

      FBT long (600 shares from May 31 entry) – bought 25.74, sold 24.87, points = (0.87), net P/L = ($534)

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



      DBC triggered yesterday, but SLV and PBW did not and have been removed from the watchlist. FBT stopped out just below the opening low. Stops have been tightened in both DXD and EWO in order to remove some risk from the trades.

    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