The Wagner Daily


Stocks got off to an encouraging start yesterday morning, but the bears resumed control in the afternoon, causing the major indices to surrender a majority of their earlier gains. The S&P 500, up 1.3% at its morning peak, finished only 0.3% higher. The Nasdaq Composite and Dow Jones Industrial Average both gave up intraday gains of 1.5% to advance just 0.4% and 0.5% respectively. The S&P Midcap 400 Index, which led the broad market’s recent March through May rally, showed relative weakness by gaining just 0.1%. The small-cap Russell 2000 ticked 0.3% higher. At their worst afternoon levels, the major indices were actually trading in negative territory, but stocks bounced modestly in the final thirty minutes of trading. All the main stock market indexes finished near the bottom third of their intraday ranges.

Turnover was mixed. Total volume in the NYSE was 4% lighter, but trading in the Nasdaq rose 7% above the previous day’s level. At first glance, one might assume the Nasdaq registered a bullish “accumulation day” by gaining on higher volume. However, a closer assessment of the intraday price to volume pattern reveals a different story. When the Nasdaq was trading 1.5% higher, at its mid-day peak, volume in the exchange was actually on track to come in 9% lighter than the preceding day’s level. It was only when stocks began dropping in the afternoon that volume picked up. This is obviously negative, and the opposite of what we would see in a healthy market. Although advancing volume in the Nasdaq marginally exceeded declining volume by a margin of 3 to 2, the adv/dec volume ratio was positive by more than 7 to 1 earlier in the day. The NYSE volume spread similarly deteriorated throughout the day to finish just fractionally positive.

We regularly talk about the 20-period exponential moving average on the hourly chart interval (20-EMA/60 min.) as being a good predictor of support and resistance for short-term trends. When trailing stops to lock in profits on steadily trending ETFs, for example, we often base our stop placement on proximity of the 20-EMA/60 min. Only when a short-term trend starts to weaken and lose its resolve does the 20-EMA/60 min. become violated. Even then, it’s common for an ETF to briefly trade through support or resistance of the 20-EMA/60 min., then resume the dominant trend an hour or two later. When scanning charts last night, we came across a great educational example of how well the 20-EMA/60 min. works as short-term support or resistance; the ProShares UltraShort S&P 500 (SDS).

For those who are not yet aware, the ProShares Short family of ETFs are designed to move in sync with their underlying indexes, but in the opposite direction. The ProShares UltraShort ETFs also move in the opposite direction of their underlying indexes, but at a leveraged ratio of two times the percentage movement of their underlying indexes. If the S&P 500 drops 1%, for example, SDS will gain approximately 2%. Therefore, buying the ProShares Short or UltraShort ETFs (such as SDS) has the same effect as selling short an ETF, except it has the added benefit of enabling investors to take bearish positions in a non-marginable account, such as an IRA or 401k, that otherwise prohibits short sales. Regarding the power of the 20-EMA/60 min. as a predictor of support or resistance, check out the hourly chart of SDS below:

Since the broad market’s short-term downtrend began on June 6, notice that SDS has pulled back to support of its 20-EMA twice, on June 10 and June 12, but bounced off it both times. If you look at an hourly chart of the actual S&P 500 Index, you will see each test of the 20-EMA/60 min. support of SDS correlated to a bounce to resistance of the 20-EMA/60 min. on the S&P 500. If you bought SDS when it broke out on June 6, you could have simply decided to remain in SDS as long as it holds above its 20-EMA/60 min. Continually trailing a stop below the 20-EMA/60 min. on steadily trending ETFs is a great, simple way to take the guesswork out of when to close your position. Selling before an actual break of the 20-EMA/60 min. can result in closing a winning position too soon. Conversely, stubbornly holding an ETF that has convincingly broken through its 20-EMA/60 min. will frequently cause you to give back hard-earned profits.

In case you’re new to using the 20-EMA/60 min. as an indicator of support or resistance, there are a couple important points to be aware of. First, note that this indicator only works well in steady, short-term trends. If an ETF has been stuck in a choppy, sideways range for more than a few days, the 20-EMA/60 min. is useless. Further, using this indicator in the manner discussed above is best for trades of a 5 to 10 day time horizon. Occasionally, really strong trends will go for several weeks or more without breaching their 20-EMAs, but only in the smoothest trending bull or bear markets. Finally, be prepared for the inevitable “stop hunts” in which an ETF will briefly probe through its 20-EMA/60 min. before reversing an hour or two later. This most frequently occurs in the form of opening gaps, but having a sound set of rules for managing gaps, such as the MTG Opening Gap Rules, is a good way to help you remain with winning positions longer.

Yesterday, we finally took our profit on the UltraShort Dow 30 ProShares (DXD) position, which we’ve been scaling into since May 29. Since the short-term trend of the Dow has been less steady than the trend of the S&P 500, DXD dipped well below its 20-EMA/60 min. during the two times when SDS perfectly bounced off it. When you see this occurring, you can just give your stop a little more “wiggle room” below the 20-EMA/60 min. Nevertheless, we sold DXD yesterday because it traded too far below the level of the prior day’s breakout, not just because it broke its 20-EMA/60 min. Recall our annotation in yesterday’s Wagner Daily of the DXD breakout above a major area of horizontal price resistance. We didn’t want to risk getting stuck holding a failed breakout, so we took the money and ran. Now that we are back to a mostly cash position, we have the luxury of taking a “wait and see” approach with regard to the market’s next direction.

Going into today, the market has not yet shown us reason to believe the recent wave of downside momentum is finished. However, don’t forget the S&P 500 has significant support of its 61.8% Fibonacci retracement and April 2008 low, right around the 1,325 level, which could trigger a wave of bullish momentum. You may want to set a price alert to notify you if the S&P hits that level, as it would be an ideal place to both cover any remaining short positions and test the water for possible re-entries on the long side of the market. We’ve had a profitable run over the past week, while the stock market moved lower, so we’re now going to lay low with new entries into the broad market. When volatility calms down a bit, we’ll re-assess which ETFs have the most promising patterns on either side of the market.

Today’s Watchlist:

Market Vectors Russia (RSX)

Shares = 400
Trigger = 55.53 (above the hourly downtrend line and 2-day high)
Stop = 54.22 (below the low of short-term double bottom)
Target = new high (will trail stop)
Dividend Date = n/a

Notes = This setup from yesterday did not yet trigger, but remains on our watchlist going into today. RSX has now traded in a tight, sideways range for the past three days, which should lend more support to the breakout if it goes today. No changes to the trigger or stop prices going into today. See commentary in yesterday’s Wagner Daily for explanation of the setup.

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):

      DUG long (350 shares from June 3 entry) – bought 29.60, stop 26.69, target 33.85, unrealized points = (1.02), unrealized P/L = ($357)

    Closed positions (since last report):

      DXD long (450 shares – 175 on May 29, 175 on June 2, 100 on June 11) – bought 53.72 (avg.), sold 56.19, points = + 2.47, net P/L = + $1,103

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



    • DXD hit its new trailing stop when the Dow rallied in the morning.
    • The RSX setup did not yet trigger, but remains on our watchlist going into today.

    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