The Wagner Daily


Stocks closed the weekly on a slightly negative note, as the broad market dipped lower on increasing volume. After opening near the flat line, the major indices sold off to their prior day’s lows in the first hour of trading. A reversal attempt in the early afternoon was short-lived, as it was met by selling pressure that shoved the main stock market indexes below their morning lows. A bounce in the final thirty minutes of Friday’s trading lifted stocks off their worst levels of the day. Both the S&P 500 and Nasdaq Composite lost 0.3%, while the Dow Jones Industrial Average slipped 0.1%. Small-caps were hit the hardest, causing the Russell 2000 to fall 1.1% and finish below its 200-day moving average again. The S&P Midcap 400 declined 0.4%. For the week, the S&P 500 managed a gain of just 0.1%, but relative strength in the tech arena helped the Nasdaq rally 1.1%.

Despite only modest percentage losses in the broad market last Friday, the worst part is that the declines were matched by higher turnover. Total volume in the NYSE rose 14% above the previous day’s level, while volume in the Nasdaq similarly ticked 9% higher. The losses on higher volume caused both the S&P and Nasdaq to register a bearish “distribution day.” Though the session was indicative of institutional selling into strength, it was the first such day of higher volume losses since September 7. An occasional “distribution day” within the context of an uptrending market is normal and can usually be absorbed by demand. However, be on the lookout for any more days of higher volume losses in the coming week. Such action could serve as a warning sign of an imminent correction.

Going into the first week of the fourth quarter, we should see some resolution in the S&P 500, in one direction or the other. Last Friday’s pullback caused the benchmark index to settle just below support of its uptrend line from the September 10 low. However, the index still remains within the range of its recent sideways channel of consolidation. The first chart below is a 120-minute time interval that shows how the S&P 500 closed the week just a bit below its trendline support, though not enough to yet declare a definitive breach of support. The chart that follows is the daily time interval, which shows near-term support and resistance levels of the current sideways range:

When the S&P 500 moved below its morning low in the final hour of last Friday’s session, it triggered our long entry in the UltraShort S&P 500 ProShares (SDS). However, because the S&P subsequently bounced off its low, we’ll be watching the position carefully today and may scratch the trade if the S&P 500 does not immediately follow-through to the downside. Like we said last week, we are not overall bearish on the market right now, but “dipping a toe in the water” on the short side provides a great reward/risk ratio at current price levels due to overhead resistance of the July highs on the daily charts.

Thanks to buying interest in several of the tech-related sectors, the Nasdaq Composite has been showing much more relative strength than the S&P 500. Over the next several days, the index could test resistance of its multi-year high that was set in mid-July of this year. The Nasdaq also remains well above support of its intermediate-term uptrend line, just above the 2,650 area. As the daily chart below illustrates, the 2,724 level marks the intraday high from July 19. Keep an eye on the price action of the Nasdaq as it nears this pivotal resistance level:

If long the market right now, odds certainly favor any Nasdaq-related sectors. Strong indexes include Computer Networking ($NWX), Internet ($INX), Biotech ($BTK), and Computer Software ($DJUSSW). Consider avoiding the Semiconductors ($SOX), as that sector is a laggard.

If the Nasdaq Composite is the current leader, then the Russell 2000 must be the biggest laggard of the main stock market indexes. Last week, we illustrated how the Russell was glued to its 200-day MA, unable to make any headway towards attempting to recapture its prior highs. That remains the case as we enter the month of October:

If the broad market were to enter a period of correction, expect small-caps and the Russell 2000 to be the downside leaders. A breakdown below support of its 50-day MA, currently at the 790 area, would generate trigger short setups in the ETFs that track the Russell 2000. The iShares Russell 2000 (IWM) is the most common one, but the inversely correlated, leveraged ProShares Ultra ETFs offer more “bang for the buck” and the ability to take bearish positions in cash accounts such as IRAs. The Russell 2000 ProShares UltraShort ticker is TWM.

Today’s Watchlist:

There are no new setups in the pre-market today.

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):

      LQD long (350 shares from August 31 entry) – (see notes below regarding dividend distributions)

      bought 104.99 (avg.), stop 103.53, target 107.48, unrealized points + 0.99, unrealized P/L + $347

      SDS long (350 shares from September 28 entry) – bought 50.88, stop 49.47, target 55.28, unrealized points (0.21), unrealized P/L ($74)

    Closed positions (since last report):


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



      Once again, LQD will trade ex-dividend today, with a dividend payout of 0.48 per share. Expect an equivalent gap down in the price of LQD today, but its second dividend distribution since our entry will be added to the total P/L of this fixed-income position. Separately, the SDS long position triggered late Friday afternoon.

      On September 4, LQD traded ex-dividend, with a dividend distribution of 49 cents per share. Unrealized points and P/L figures include this distribution, which will be paid out on September 10.

    Click here for a free trial to Morpheus Trading Group’s other newsletter services.

    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