The Wagner Daily


The stock market’s attempted bounce that began on March 4 turned out to be rather short-lived, as the major indices sliced below their recent lows. Unlike the previous session, yesterday was a steadily trending day. Stocks gapped lower on the open, then built on their opening losses throughout the rest of the day. The Dow Jones Industrial Average plunged 1.8%, the S&P 500 2.2%, and the Nasdaq Composite 2.3%. Small-caps suffered the most, evidenced by the 3.1% loss in the Russell 2000 Index. The S&P Midcap 400 similarly shed 2.8%. The broad market was a bit choppy during the final hour, but the main stock market indexes eventually settled at their dead lows.

Total volume in the NYSE ticked 2% lower, while volume in the Nasdaq was 3% lighter than the previous day’s level. Turnover was roughly on par with Wednesday’s levels, but market internals were about as nasty as they get. Declining volume in the NYSE trounced advancing volume by a margin of approximately 20 to 1. Furthermore, 2,800 stocks in the NYSE lost ground, while just 350 climbed. These numbers indicate just how broad-based the sell-off was. Even strong sectors such as commodities, miners, and energy were not immune to yesterday’s selling spree.

In yesterday’s Wagner Daily, we pointed out the bearish chart patterns in the Retail and Real Estate sectors. Both sector indexes broke down below their horizontal bases of support yesterday, with the bottom falling out of real estate. The DJ U.S. Real Estate Index ($DJUSRE) swooned more than 4%. As per our pre-market plan, we bought the inversely correlated UltraShort Real Estate ProShares (SRS) when it broke out above the high of its five-week range. By day’s end, SRS had zoomed nearly 11 points higher. We’re presently showing an unrealized gain of more than 5 points since our entry yesterday morning. The breakout above the range was of textbook quality, complete with a close at its best level of the day, a steady intraday trend, and higher volume by day’s end:

Year-to-date, the S&P 500 has already shed 11.2%. However, the performance of our ETF trades in The Wagner Daily has actually been quite strong. After having compiled our February stats yesterday, we noticed the model account is on track for its most profitable quarter ever. Presently, it is already showing a net gain of 21.7% in the first two months of the year. Upon reflection of the reasons behind the gains, we decided to share some general strategies that have been working well for us in this challenging environment.

When I experienced my first bear market as a professional trader back in the year 2000, I was admittedly a bit naive. I logically assumed that profiting in a bear market would be no more difficult than profiting in a bull market. I only had to sell short stocks and ETFs instead of buying them, right? Wrong! I quickly learned there were many differences in a bear market that required fine tuning of my strategy in order to profit. Below is a summary of what I learned in the years that followed, which have been the keys to our strong profitability in recent months. If you’re struggling a bit, we hope this will be of assistance to your trading and investing operations:

  • Bear markets require a shorter time horizon. As trend traders, we prefer to enter positions we can ride for weeks, or even months, at a time. In bull markets, one can buy a strongly trending ETF on a pullback, then let the trade resume its uptrend while trailing a protective stop along the way. Bear markets are different. Even if an ETF has been trending lower for several months, the counter-trend bounces are often much more violent than the gentle pullbacks experienced by strongly uptrending ETFs. This is because the natural tendency of the market is to go up over the course of time. Therefore, when buyers eventually step in, the upward momentum can be fast and furious, easily stopping traders out of their short positions that may have been showing a nice profit the day before. To prevent this from happening, one simply needs to enter all positions, both long and short, with a shorter than usual time frame (unless you’re already a daytrader). If you compare the holding time of our individual ETF trades in recent months versus during the most recent bull market, you’ll notice the overall time frames have been shorter. Yesterday, for example, we bought the UltraShort S&P 500 ProShares (SDS) with the intention of closing it intraday if necessary, but we kept it overnight because it closed with a profit buffer of more than one point from our entry above the previous day’s high. We normally avoid daytrading in bull markets because it isn’t necessary, but it’s not a bad idea in bear markets.
  • Be careful to avoid overtrading in a bear market. Despite being on pace for our historically most profitable quarter, we ironically have not taken many positions over the past two months. Many days, we were fully in cash. One doesn’t need to be heavily exposed in a bear market, for the momentum tends to be much stronger, providing greater volatility and profit potential on each and every trade. This is true of short sales in the direction of the primary trend, as well as short-term countertrend bounces that one may buy. Getting too aggressive with a high number of positions in a bear market is not only risky, but simply not necessary. Solid profits can be earned by merely “cherry picking” the best setups, then patiently waiting on the sidelines for them to trigger. Remember that cash is always a valid position, especially in bear markets!
  • Be aware that stocks and ETFs fall much faster than they go up. The human emotions of fear and greed are the driving forces behind the stock market at all times. In bull markets, it’s greed that drives the market higher. Fear is obviously what causes the market to fall apart in bear markets. Between the two emotions, fear is always stronger than greed. That’s the reason why stocks and ETFs always fall harder and faster than they go up. Armed with this knowledge, one must be extremely proactive and disciplined in adhering to protective stop losses. You may be able to get away with a few blown stops on long positions in a bull market, but ignoring stop losses in a bear market can cause irreparable damage to your trading account. Your goal in bear markets must be capital preservation. Without such a laser focus on capital preservation, you’ll run out of funds before having the pleasure of participating in the next bull phase that will eventually come along.

After Tuesday’s late-day bullish reversal, we said the following morning, “If this were a bull market, the “hammer” candlestick patterns that formed on the daily charts of the major indices would probably lead to further gains in the near-term. But, as you may have noticed, we’re in a bear market. In recent months, bullish patterns have fizzled out a majority of the time, so we’re hesitant to predict follow-through gains from yesterday’s bullish reversal.” Unfortunately for many investors, those words rang true. Stocks managed a half-hearted rally on Wednesday, but gave it all back and tumbled down to their March 4 lows yesterday.

As anticipated, the S&P 500 joined the Nasdaq by setting a new 52-week closing low yesterday. The Dow violated its prior closing low from February, but is still a few points above its January low. With two of the “big three” stock market indexes at fresh 52-week lows, the odds clearly favor the short side of the market, but don’t get too cocky. As explained above, just a few well-placed positions can yield solid profits with minimal risk. Long is wrong, shorts are better, and cash is king. We’re content with our two bearish positions in the S&P 500 and Real Estate sectors.

Today’s Watchlist:

There are no new 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):

      SRS long (100 shares from March 6 entry) – bought 118.13, stop 116.22, target 130.90, unrealized points = + 5.87, unrealized P/L = + $587

      SDS long (300 shares from March 6 entry) – bought 65.80, stop 66.64, no specific target (trailing tight stop), unrealized points = + 1.32, unrealized P/L = + $396

    Closed positions (since last report):


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



      The SRS setup triggered shortly after the open. We subsequently bought SDS per intraday e-mail alert. Both positions looking good, but we have trailed stops tighter, as per above, to lock in gains and minimize risk.

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Edited by Deron Wagner,
MTG Founder and
Head Trader