The Wagner Daily


Driven by a strong earnings report from Apple Computer, stocks gapped firmly higher on yesterday’s open, dipped to the flat line just before mid-day, then rallied back to the highs late in the afternoon. Once again, wide divergence between the Nasdaq and the other main stock market indexes was prevalent. The Nasdaq Composite cruised to a 1.7% gain, while the tech-heavy Nasdaq 100 Index leapt 2.2% higher. The S&P 500 and Dow Jones Industrial Average advanced 0.9% and 0.8% respectively. The small-cap Russell 2000 climbed 1.0% and the S&P Midcap 400 gained 0.7%. Like the previous day, all of the major indices closed at their intraday highs.

Total volume in the Nasdaq increased 15% over the previous day’s level, confirming the presence of institutional buying in the tech arena, but turnover in the NYSE declined by 6%. The higher volume gains in the Nasdaq enabled the index to score a bullish “accumulation day,” a positive sign considering the five recent “distribution days.” Trading activity was less enthusiastic in the S&P and Dow. Despite the broad-based gains, market internals were not overly strong. In both exchanges, advancing volume exceeded declining volume by approximately 2 to 1. Most of the market’s gains resulted from the opening gap up, as opposed to intraday uptrends.

Since breaking out above resistance of their intermediate-term downtrend lines last week, many of the fixed-income (bond) ETFs have been consolidating in a tight range, near their highs. We recently sold the iShares Corporate Bond (LQD) into strength, which netted a nice profit when considering the monthly dividend distributions. Now, we have our eyes on the iShares 20+ year Gov’t Treasury Bond Fund (TLT). If it breaks out above the high of its three-day range, we plan to initiate a long position:

Again, remember that one of the biggest benefits of trading the fixed-income ETFs is their monthly dividend distributions. Though the volatility of the actual ETF is rather low, it’s not that bad when considering substantial dividends are paid at the beginning of every month. If we buy TLT on the breakout, our target will be a new 52-week high, at which point we will trail a stop to lock in gains. Our stop will be below support of the recent range.

Though the Nasdaq has been showing relative strength ever since the August 18 broad market bottom, the bullish divergence in the index has really become apparent over the past two days. While the S&P 500 has recovered just over half of its large loss from the October 19 sell-off, the Nasdaq has already recovered all of that day’s loss. This is in line with what we said in yesterday’s Wagner Daily, which was “If the broad market manages to stabilize near current levels, expect the Nasdaq indices to be the first of the broad-based indexes to zoom back to new highs. If buying the market right now, the Nasdaq is clearly the place to be. . .” After closing below its 20-day EMA for only one day, while remaining firmly above its 50-day MA the whole time, the Nasdaq Composite is once again poised to break out to new highs:

Unlike the Nasdaq, both the S&P and Dow have a lot of overhead resistance from their recent sell-offs, so those indexes will likely be the first to break down to new lows if another round of selling hits the market. The current dynamic in the market is rather unusual, as the price divergence within the main stock market indexes is quite substantial. Other than sitting in cash, which is never a bad idea, the only logical thing we can do is follow the trends through buying strong sectors in the Nasdaq when they pull back, and/or selling short the weak sectors in the S&P/Dow when they bounce into resistance.

Today’s Watchlist:

TLT – iShares 20+ year Gov’t T-bond Fund

Shares = 500
Trigger = 90.71 (above the high of the range)
Stop = 89.42 (below the Oct. 19 low)
Target = new high (will trail stop)
Dividend Date = November 1, 2007

Notes = See commentary above for explanation of the setup. Note that our stop will need to be adjusted lower when TLT makes it dividend payment. Stop will be moved lower by the same amount of the distribution.

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):

      XLU short (500 shares from October 19 entry) – sold short 40.60, stop 41.39, target 38.53, unrealized points + 0.56, unrealized P/L + $280

      OIH short (100 shares from October 23 entry) – sold short 188.91, stop 194.70, target 177.80, unrealized points (3.06), unrealized P/L ($306)

    Closed positions (since last report):

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

      bought 41.28 (avg.), sold 38.14, points (3.14), net P/L ($948)

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



      Yesterday, we stopped out of UNG, using the MTG Opening Gap Rules to set the stop below the 20-minute low. Though the result of this trade was disappointing, at the time of entry, it was a solid setup that showed promise with follow-through on its trend reversal. Yet, the reversal failed. Even with the loss, we’re still having a great month, aided by several other large recent winning trades. Win some, lose some, that’s the law of averages in this business. Note that our re-entry price failed to trigger. For now, the re-entry setup has been canceled.

      Per intraday e-mail alert, we also re-entered OIH on the short side. However, because we were shorting a bounce into resistance, we decreased our share size in order to allow for a wider stop.

    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