The Wagner Daily


Not surprisingly, Tuesday’s late-day rally failed to generate any upside momentum. On the contrary, traders sold into strength of the modest bounce, causing the major indices to firmly plunge to new five-year lows. The Dow Jones Industrial Average fell 5.1%, the S&P 500 6.1%, and the Nasdaq Composite 6.5%. Small and mid-cap stocks fared even worse. The Russell 2000 nosedived 7.8% and the S&P Midcap 400 lost 7.4%. With the exception of the Dow, all the main stock market indexes closed at their dead lows of the day, month, and the past five years. Closing below 8,000, the Dow Jones Industrial Average set a fresh five-year closing low, but fractionally held above its intraday lows of October 10 and November 13.

Total volume in the NYSE increased 12%, but Nasdaq volume was roughly the same as the previous day’s level. Prior to yesterday, the one glimmer of hope for bulls was the positive price to volume relationship the stock market has exhibited since its November 13 bullish reversal day. But higher volume in the NYSE caused the S&P 500 to suffer a “distribution day” that was indicative of institutional selling. Atrocious market internals means the selling was also extremely broad-based. In both the NYSE and Nasdaq, declining volume destroyed advancing volume by an unbelievable margin of approximately 50 to 1! In the NYSE, there were more than 3000 declining issues, with only 200 advancing issues. The Nasdaq adv/dec ratio was equally disastrous.

Over the past two months, we’ve had two profitable trades in CurrencyShares Japanese Yen (FXY). The first trade was a breakout entry in October, and the second trade was a buy entry on the subsequent pullback to support in the beginning of this month. In both cases, we sold into strength of the rallies that followed. Yesterday, we bought FXY again, after it broke out above a short-term base of consolidation. This is shown on the daily chart of FXY below:

The red horizontal line on the chart above shows the short-term consolidation of FXY. We bought at 103.77, after FXY broke out above that line. The blue dashed line is the intermediate-term downtrend line from the October high. Since FXY closed just above that level yesterday, our next price target for FXY is a test of that October 24 high. If it follows through to the upside, our projected timeframe for such a move is 3 to 10 days. As per our November 19 commentary, we’re generally not keen on new swing trade entries right now, but FXY may be an exception because it has been trending pretty smoothly. Notice, for example, how well the 20-day exponential moving average (the beige line) has acted as support. Furthermore, we like that FXY is not correlated directly to the price action of the broad market.

If there’s anything good about yesterday’s broad-based sell-off, from a trader’s standpoint, it’s that the S&P and Nasdaq finally stopped toying with the pivotal support levels of their prior lows. From November 13 to 18, the bulls and bears engaged in a tug-of-war as the major indices tried to hold key support of their multi-year lows. This resulted in extremely whippy and erratic price action that made it equally challenging for traders to hold long or short positions. But now that the major indices have broken down to new lows, steadier, more tradeable trends may develop, albeit to the downside. The exception, of course, would be if stocks somehow manage to suddenly pop back above yesterday’s highs in today’s session. Assuming that doesn’t happen, tradeable setups on the short side may develop by waiting for the next bounces into resistance of the breakdown levels. In the case of the inversely correlated UltraShort ETFs, this would equate to waiting for a pullback to the breakout levels.

With the S&P 500 and Nasdaq Composite at new five-year lows, let’s take an updated look at the long-term monthly charts to see where the indices may find their next major levels of price support. Below is a monthly chart of the S&P 500 Index:

With the S&P 500 falling well below its 61.8% Fibonacci retracement from its year 2002 low to year 2007 high, the only significant levels of support to consider are the year 2003 and year 2002 lows. The next support should be the March 2003 low of 789, which is circled in pink. Since that level is only 2% below the current price of the s&P 500, it’s logical to expect a test of that support level in the coming days. Below that is the ultimate low of 769 (circled in black), which marked the low of the “dot com” bear market in October of 2002. We would be quite surprised if support of the October 2002 low fails to generate at least a tradeable, intermediate-term bounce. Nevertheless, we also would not place any strong bets that it will. When you’re dealing with a market that has given back several years of gains in just two months, anything is possible. Next, take a look at the monthly chart of the Nasdaq Composite:

At first glance, one might assume the Nasdaq has been showing relative strength to the S&P 500 because it is still well above its lows of 2002 and 2003. However, the Nasdaq only recovered half of its year 2000 to 2002 losses before entering into its current downtrend. Conversely, the S&P 500 formed a “double top” at its year 2000 lows, in October of 2007. The Dow performed even better by rallying to new all-time highs last year. Therefore, the Nasdaq has actually been showing relative weakness to the S&P and Dow over the past six years.

Investors with a 401k or other long-term account may find a bit of comfort in knowing the major indices are nearing major support of their year 2002 and 2003 lows. However, active traders who try to pick a bottom near these levels, without first waiting for a bottoming pattern, may find themselves churning their accounts before getting their timing right. As such, we believe the best course of action is to continue focusing on quick, intraday moves until the markets show real signs of stabilization that last more than a few days. Simply put, the trend remains “down” until the market proves otherwise. Stay nimble out there, and don’t fall in love with either side of the market!

Today’s Watchlist:

There are no new setups in the pre-market today. As per our November 19 commentary, we’ve temporarily shifted our focus to intraday trades, or being flat altogether, until market conditions stabilize. If the major indices follow through on the breakdown to new lows, tradeable setups may soon develop on the short side, but it’s safer to wait for a rally into resistance, rather than selling short an obvious break of support.

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):

      FXY long (150 shares from Nov. 19 entry) –

      bought 103.77, stop 101.24, target new high (will trail stop), unrealized points = + 0.63, unrealized P/L = + $95

      DGP long (500 shares total — 350 from Oct. 24 entry, 150 from Nov. 19 entry) –

      bought 13.51 (avg.), stop HALF position at 12.48, HALF position at 11.48, target 17.28, unrealized points = (0.40), unrealized P/L = ($200)

    Closed positions (since last report):

      GDX long (400 shares from November 19 daytrade entry) –

      bought 20.33, sold 20.20, points = (0.13), net P/L = ($60)

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



    • Per Intraday Trade Alert, we entered GDX as a daytrade. Although the gold mining sector showed great relative strength on the open, it quickly faded. As such, we waited for the first bounce in GDX, then sold for a scratch. GDX subsequently moved much lower.
    • Per Intraday Trade Alert, we added to our existing DGP position. With the larger share size, we have also updated our stop price. We’re now using a split stop, as detailed above.
    • Reminder to subscribers – Intraday Trade Alerts to your e-mail and/or mobile phone are normally only sent to indicate a CHANGE to the pre-market plan that is detailed in each morning’s Wagner Daily. We sometimes send a courtesy alert just to confirm action that was already detailed in the pre-market newsletter, but this is not always the case. If no alert is received to the contrary, one should always assume we’re honoring all stops and trigger prices listed in each morning’s Wagner Daily. But whenever CHANGES to the pre-market stops or trigger prices are necessary, alerts are sent on an AS-NEEDED basis. Just a reminder of the purpose of Intraday Trade Alerts.

    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