The Wagner Daily


Short-term indecision in the stock market continued yesterday, as the major indices plunged to give back all of last Friday’s large gains, and then some. Both the S&P 500 and Nasdaq Composite fell 2.0%, as the Dow Jones Industrial Average tumbled 2.1%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 2.3% and 2.0% respectively. Unlike recent days of choppy intraday price action, stocks opened lower, then trended steadily south throughout the entire session. Inverse of the previous day, all the major indices finished at their intraday lows.

Turnover was mixed yesterday, but remained among the lightest levels of the year. Total volume in the NYSE declined for a third straight day, registering 5% lower than the previous day’s level. Volume in the Nasdaq was higher by the same percentage. Ugly market internals confirmed the broad-based selling of yesterday’s session. Declining volume in the Nasdaq exceeded advancing volume by nearly 10 to 1. The NYSE adv/dec volume ratio was negative by a ratio of 7 to 1.

Several of the fixed-income (bond) ETFs broke out above resistance yesterday, pointing to a renewed “flight to quality” on the part of investors and traders. One of the most popular fixed-income ETFs is iShares Lehman 20+ Year T-bond Fund (TLT), which gapped up to break out above a key area of resistance yesterday. This is shown on its daily chart below:

Because it has not yet moved too far above the breakout level, a new long entry in TLT is still okay at current levels. With a protective stop placed just below the breakout level, around the $93.25 to $93.50 area, a positive reward/risk ratio can be achieved. If yesterday’s move turns out to be a one-day “fakeout breakout,” the loss would be minimal by having a relatively tight stop. However, if yesterday’s bullish move commences a new uptrend, you’ll be positioned at a good price level that allows for holding through subsequent pullbacks. Although the fixed-income ETFs generally have low volatility (Average True Ranges), don’t forget they also distribute substantial dividend payments on a regular basis, the same as if you owned individual bonds. At the beginning of this month, for example, TLT distributed a dividend payment of 0.33 per share. When factoring this in with capital gains from a new potential uptrend, the fixed-income ETFs offer an attractive opportunity, especially for those looking for a place to park some cash with relatively low risk in this unsteady market environment.

Going into yesterday’s session, the main stock market indexes were basically in “no man’s land,” trapped between near-term areas of support and resistance. In yesterday morning’s Wagner Daily, we cautioned against putting much faith into last Friday’s rally. With last week’s turnover limping in at its lowest level of the year, we suggested it would only require a a minimal amount of selling pressure to undo Friday’s gains. Unfortunately for the bulls, that’s exactly what happened yesterday. But with volume likely to remain light until after the Labor Day holiday has passed, stocks could very well remain range-bound throughout the rest of the week. Nevertheless, yesterday’s sell-off caused the main stock market indexes to close very near key support of last week’s “swing lows.” If the indexes convincingly drop below those lows in today’s session, downside momentum could easily kick in ahead of the holiday weekend. To illustrate this precarious state of the broad market, take a look at the daily chart of the S&P 500:

From mid-July through mid-August, an uptrend line formed on the S&P 500, which is marked as the red ascending line on the chart above. On August 19, the S&P 500 declined to break support of that uptrend line, as well as both its 20 and 50-day moving averages. This caused us to change our overall short-term market bias from bullish to neutral. Then, on August 22, the S&P 500 rallied back above its 20 and 50-day moving averages, but ran into new resistance of its prior uptrend line (circled in blue). Why is this resistance? Because a prior level of support usually becomes the new area of resistance, after the support is broken. If you were not aware of this basic tenet of technical analysis, the chart above is a perfect educational example of this. Combined with the extremely light volume that accompanied that move into the prior uptrend line, it was not surprising that stocks pulled back again yesterday. From here, the big question is whether or not the S&P 500 will hold last week’s low of 1,261 (the black, horizontal dotted line). If it doesn’t, a “lower high” and “lower low” will be in place, officially changing the short and intermediate-term trends to bearish.

Because it bears reinforcement at this juncture, we will close by re-iterating the final paragraph of yesterday’s commentary, “We probably won’t see the real direction of the market’s next move until traders and investors begin returning to their desks in the beginning of next month. Until then, it makes sense to take it easy with regard to entering new positions. Realize the best traders are typically out of the market more than they’re in the market, meaning they carefully pick their opportunities to strike, while laying low the rest of the time. This prevents them from churning their accounts and giving back profits during the more challenging periods. The coming (current) week is probably one of those times to lay low. Simply setting stops on existing positions and taking a one-week break from trading is certainly not a bad idea. Rather than trading through this slow period, consider using the extra time to thoroughly scan the market for new opportunities in September. Then, you too will be fresh and ready to strike when the moment is right!”

Today’s Watchlist:

We will probably avoid entering any new ETF positions ahead of the Labor Day holiday. This week is traditionally marked by extremely low-volume that exacerbates choppy price action in the broad market. We’re already positioned in the strongest industry sector (healthcare), and still have a short position in the Dow as a hedge. Despite a few recent stop-outs, we are still on track for a profitable month in a challenging market environment. As always, we will promptly send an Intraday Trade Alert if/when we enter anything new. The two solar ETFs, KWT and TAN, are still on our watchlist for potential entry on a pullback or consolidation.

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. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.

    Open positions (coming into today):

      DXD long (250 shares from August 18) – bought 60.60, stop 59.77, target 66.40, unrealized points = + 1.98, unrealized P/L = + $495

      IBB long (200 shares from August 21 re-entry) – bought 86.18, stop 84.89, target new high (will trail stop), unrealized points = (0.07), unrealized P/L = ($14)

      IYH long (350 shares total – bought 250 on Aug. 5, added 100 on Aug. 14) –

      bought 66.86 (avg.), stop 65.57, target 71.12, unrealized points = (0.18), unrealized P/L = ($63)

    Closed positions (since last report):


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



    • No changes to open positions.

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Edited by Deron Wagner,
MTG Founder and
Head Trader