The Wagner Daily

Commentary:

Stocks wrapped up the week on a rather nasty note, as bearish momentum that began developing earlier in the week accelerated rapidly. The main stock market indexes gapped lower on the open, then immediately slid into steady intraday downtrends that lasted throughout the entire session. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each suffered identical losses of 2.6%. Small-caps felt the pain even more, as the Russell 2000 plunged 3.2%. The S&P Midcap 400 was lower by 2.4%. All of the major indices closed at their dead lows of the day and the week, positioning the stock market for more selling pressure into today’s open.

Sharply higher turnover in both exchanges confirmed the definite presence of institutional selling. Total volume in the NYSE rocketed 41% above the previous day’s level, while volume in the Nasdaq increased 16%. Part of the volume increase could have been attributed to last Friday being monthly option expiration day, but the substantially higher turnover still caused both the S&P and Nasdaq to register another “distribution day.” In the October 16 issue of The Wagner Daily, we said that, “. . .the presence of four or more such days of institutional selling in a short period is definitely a warning sign to astute traders. When an index flashes five or more instances of institutional selling in just a few weeks, a substantial pullback is usually imminent. Remember that stocks eventually follow the overall direction of institutional trading activity. . .” The fourth such day of higher volume losses that occurred last Tuesday definitely provided a legitimate warning signal to Friday’s blowout, which also marked the fifth “distribution day” in recent weeks. With institutional selling now clearly dominating the markets, the odds of profiting on the long side of the market are significantly against traders.

Prior to Friday, the Dow Industrials was the only major index that was trading below lower boundary support of its primary uptrending channel. Due to its relative weakness, the Dow was also the first of the major indices to cross back below its 50-day MA. Horizontal price support from the September 4 high, shown on the chart below, may temporarily help the index to hold up in the short-term:

The S&P 500 settled a few points above its 50-day MA, but expect an imminent test of that pivotal support level today. On the daily chart below, notice how the prior high from September 4 converges with support of the 50-day MA. Like the Dow, this area of horizontal price support could help the S&P today, especially with the 50-day there as well:

The Nasdaq continues to look technically better than both the S&P and Dow. Not only is it still within the confines of its primary uptrending channel, but the index also remains above its prior high from July:

Despite the bloodbath in the overall market, we actually had a very profitable (and busy) day last Friday. First, we closed out two open positions – IWM short and LQD long. We covered the IWM (Russell 2000) short position as it neared our original profit target of the 200-day MA, netting a gain of 3% since our October 11 short sale. Later in the afternoon, selling in the Russell really picked up, causing IWM to blow through both its 50 and 200-day MAs. We normally trail stops in winning positions to maximize gains, but we prefer to sell into strength (or cover short positions into weakness) when major support/resistance levels like the 200-day MA are near. We also locked in a similar gain through selling our long position in the iShares Corporate Bond Fund (LQD). We pointed out the breakouts in the fixed-income ETFs a few days ago, and we simply sold LQD when it reached our dividend-adjusted profit target.

In addition to closing two positions last Friday, we opened two new ones as well. First was our short position in the S&P Utilities SPDR (XLU), which triggered for short entry when it fell below its 20-day EMA. We had been stalking it for a potential short sale during the latter half of last week. XLU fell more than 2% after our short entry, but our downside price target is a bit lower, around support of the 61.8% Fibonacci retracement from the August low to the October high. Finally, a profit warning in the Oil Service sector caused extreme relative weakness to appear in the Oil Service HOLDR (OIH). We initiated a new short position after OIH gapped down, then broke below the low of its first 20-minutes. OIH eventually closed the day with a whopping 6.1% loss. Admittedly, we were a bit surprised that it fell more than 12 points in just one day. As such, it is already near our profit target of the 50-day MA, which it will probably see on the open.

Obviously, all bets are now off on the long side of the market. Not only have the volume patterns turned firmly bearish, but major support levels in the major indices are being broken as well. Both the S&P and Dow now have formed bearish “double top” patterns on their daily charts. This often leads to rapid downward momentum caused by the trapped bulls reversing their positions and closing out stocks that failed their breakouts. Overall, watch how the major indices behave near their 50-day MAs for a clue as to how severe current downward momentum may be.

Today’s Watchlist:

There are no new pre-market setups for 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):

unrealized P/L + $1,068

XLU short (500 shares from October 19 entry) – sold short 40.60, stop 41.39, target 38.53, unrealized points + 0.86, unrealized P/L + $430

UNG long (300 shares total – 250 shares from Oct. 16, added 50 on Oct. 17) –

bought 41.28 (avg.), stop 38.23, target 46.40, unrealized points (1.67), unrealized P/L ($501)

Closed positions (since last report):

net P/L + $921

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

bought 104.99 (avg.), sold 106.60, points + 2.58, net P/L + $896

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

$69,109

Notes:

On September 4, LQD traded ex-dividend, with a dividend distribution of 49 cents per share. On October 1, LQD traded ex-dividend and paid out 48 cents per shares. Unrealized points and P/L figures include these distributions.

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Edited by Deron Wagner,
MTG Founder and
Head Trader

Deron Wagner

Deron Wagner is a professional trader, author of several ETF trading books, and the Founder of Morpheus Trading Group. Since 2002, he has been sharing his proven swing trading strategy with thousands of traders around the world. He has appeared on CNBC, ABC, and Yahoo! Finance Vision television networks, and is a frequent guest speaker at various global investing conferences.