The Wagner Daily


After spending the past several weeks locked in a choppy, sideways range, the major indices finally made a definitive move on the last day of the month. Unfortunately for the bulls, it was in a southerly direction. Stocks gapped open below their previous day’s lows, then suffered another leg down in the afternoon. The Dow Jones Industrial Average tumbled 2.5%, the Nasdaq Composite 2.6%, and the S&P 500 2.7%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 2.8% and 3.0% respectively. The main stock market indexes finished near their intraday lows, as well as their worst levels of the month.

Turnover in the NYSE ticked 9% higher, while total volume in the Nasdaq jumped 15% above the previous day’s level. In both exchanges, volume rose firmly above average levels for the first time in more than three weeks. Institutions finally resumed substantial trading activity, but they obviously re-joined the action on the sell side. Market internals were atrocious. Declining volume in the NYSE blew away advancing volume by a whopping margin of 16 to 1. The Nasdaq adv/dec volume ratio was negative by 9 to 1. The combination of high volume, extremely negative market internals, and big percentage drops in the major indices is often representative of “capitulation” that precedes the formation of market bottoms. However, we don’t think that was the case here because the increase in volume was still relatively modest. Volume spiked to much higher levels in many sessions throughout January.

In last Friday morning’s commentary, we said that the near-term direction of the broad market depended on whether or not financial stocks resumed their firmly established primary downtrends. We also pointed out the sudden relative weakness in the Banking Index ($BKX) and suggested that the bearish divergence between the $BKX and S&P 500 would likely intensify in the coming days. Not surprisingly, that’s exactly what happened. On the hourly overlay chart below, notice how the relative weakness we pointed out after the February 28 session became even more apparent after the February 29 hammering:

Last Thursday, the $BKX lost 3.5% compared to just 0.9% in the S&P 500. The following day, the S&P 500 plunged 2.7%, but the $BKX still led to the downside with a 4.2% drop. Selling short sectors with relative weakness to the S&P 500 not only results in greater profit potential when stocks are falling, but also affords lower risk if the broad market suddenly reverses back up. Sectors with relative weakness typically lag when the major indices eventually rally. Comparing the gains or losses of the main industry sectors to the S&P 500 and/or Nasdaq Composite every day is a great way to spot relative weakness ahead of the crowd. In bull markets, the same concept is used to spot relative strength and leading ETFs.

The downside follow-through in the $BKX finally enabled the UltraShort Financials ProShares (SKF) to break out of its three-week trading range. We illustrated the potential breakout above the intermediate-term downtrend line in our most recent commentary, and SKF perfectly popped above resistance of that trendline last Friday. More importantly, it closed above the high of its recent range. This, of course, is a rather bearish sign for the financial sector, and the broad market in general:

Our original plan was to buy a breakout above the downtrend line in SKF last Friday. However, we made a judgment call to pass on the entry because the sharp opening gap up, right into resistance of the top of the recent range, negatively skewed the risk/reward ratio of the setup. Nevertheless, we’ll still be looking for a potential entry point if SKF pulls back to new support of the breakout level. Remember that a prior level of resistance becomes the new support level after the resistance is broken. Though we didn’t buy SKF, our February 28 entry in the UltraShort Dow 30 ProShares (DXD) is already showing an unrealized gain of 5.1%.

On a technical level, last Friday’s sell-off was quite significant for the Nasdaq Composite. While other stock market indexes are still above support of their February lows, the Nasdaq closed below its prior lows from both February and January. On an intraday basis, the index traded lower several times over the past two months, but its closing price marked a fresh 52-week low. On the daily chart below, notice how resistance of the 20-day exponential moving average (the beige line) has been like a brick wall. This is a good example of the power of the 20-day EMA as support or resistance in strongly trending markets:

Unless last Friday’s breakdown in the Nasdaq was a “fakeout” that fails to hold, expect the S&P and Dow to soon follow suit to new closing lows as well. For the S&P 500, support of the February closing low is 1,326, right around last Friday’s intraday low. A break below the January low of 1,310 would send the S&P to a new 52-week low. For the Dow, we’re looking at support levels of 12,182 (February closing low) and 11,971 (January closing low). We suggest setting price alerts on your trading software to instantly notify you if any of these levels are breached. Downside momentum could pick up quite rapidly if the S&P and Dow start falling below these levels. Since the broad-based indexes are now in the vicinity of their prior significant lows, we’ll assess the next major support levels by looking at their long-term charts in tomorrow’s Wagner Daily.

Today’s Watchlist:

There are no pre-market trade setups. As per the commentary above, we passed on last Friday’s SKF entry due to the large opening gap into resistance of its recent range. But now that it has confirmed the breakout, we are looking for an entry on either a pullback or price consolidation. We’ll promptly send an intraday e-mail alert if/when we enter SKF (or anything else). In the meantime, we’ll focus on managing our existing DXD position for maximum profitability.

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):

      DXD long (400 shares from February 28 entry) – bought 54.84, stop 54.83, target 59.85, unrealized points = + 2.81, unrealized P/L = + $1,124

    Closed positions (since last report):


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



      We have removed all the risk from the DXD trade by trailing our stop to breakeven, and just below new support of the 50-day MA. In order to maximize profit and lock in gains along the way, we’ll continue trailing the DXD stop higher in the coming days.

    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