The Wagner Daily


After opening near the flat line, the major indices initially attempted to follow through on yesterday’s bullish momentum, but stocks turned tail at mid-day, thereafter heading south throughout the afternoon. The S&P 500 and Dow Jones Industrial Average gave back about two-thirds of the previous day’s gains, falling 1.9% and 2.1% respectively. The Nasdaq Composite surrendered an earlier 1.0% gain to finish 1.1% lower, but the index showed relative strength by retracting only a little more than a third of Tuesday’s gain. The small-cap Russell 2000 shed 2.1% and the S&P Midcap 400 lost 1.8%. Opposite of the previous day, all the main stock market indexes closed near their intraday lows.

Total volume in the Nasdaq ticked 5% higher, causing the index to register a bearish “distribution day.” Volume in the NYSE, however, was on par with the previous day’s level. Volume has slowly been returning from last Friday’s lethargic, pre-holiday pace, but turnover in both exchanges remained below average levels; it has been ten days since trading in either exchange was greater than average. Since stocks have been in a choppy, sideways range for the past several weeks, it’s not surprising that institutions have largely been sitting on the sidelines. When the main stock market indexes eventually break out of their recent ranges, in either direction, the move will likely be accompanied by a volume spike as well.

One of the major drags on the stock market yesterday was the weak performance in the financial sector. Showing clear relative weakness to the major indices yesterday, the Insurance Index tumbled 4.4%, the Bank Index ($BKX) 3.8%, and the Securities Broker/Dealer Index ($XBD) 2.8%. The $BKX has been consolidating near the lows of its recent range, in a tight channel, over the past four days. Any further weakness in today’s session will likely cause the index to lose short-term support:

If the $BKX happens to break support in today’s session, the various financial ETFs may be worth a look on the short side. However, because the 50-day moving average is about 5.6% below the current price of the $BKX, any short entries in the financial sector should initially be entered with a very short-term time horizon, perhaps an expectation of 1 to 3 days. Presently, we’re positioned in the inversely correlated UltraShort Financials ProShares (SKF), which we bought on the break of its downtrend line a few days ago. If the $BKX breaks down and quickly finds major support at its 50-day moving average, we’ll simply trail a tight stop on SKF to lock in any gain. But if downside momentum on the financials really gets moving, we’ll give SKF a little looser leash and slightly longer holding period.

CurrencyShares Japanese Yen (FXY), which is presently showing a two-point gain since our original entry, is shaping up nicely for a swing trade on the long side (if you’re not already in). Unlike most ETFs, FXY has a very low correlation to the direction of the stock market, making it an ideal trade candidate in an indecisive market. It recently broke out above its downtrend line, is showing relative strength, and is now on a very short-term pullback to support of its 10-day moving average. A buy entry above the 20-period exponential moving average on the hourly chart would coincide with a break of its hourly downtrend line, which should subsequently enable FXY to resume its newly established uptrend. The buy setup is shown on the hourly chart below:

As for the broad market’s condition…well, well, well! The S&P and Dow have once again closed right at their pivotal 20-day exponential moving averages, which have acted like electromagnets for the past two weeks. Take a look:

We hate to sound like a broken record (remember vinyl?), but, other than a few very short-term plays, there’s really not much to do until stocks make a definitive, convincing move in one direction or the other. With the 50-day moving averages closing in from below, and the 200-day moving averages closing in from above, it shouldn’t be much longer until we see the trend resolution we’ve been discussing. The big question, of course, is which direction will the breakout be? Obviously, nobody knows for sure, but the great news is that we don’t need to worry about it — we’ll be prepared either way. Like we said in yesterday’s closing commentary, “Keeping a healthy portion of cash in your portfolio is a great way to prevent churning your account until the market eventually makes up its mind.”

Today’s Watchlist:

S&P Healthcare SPDR (XLV)

Shares = 400
Trigger = 25.88 (above the May 13 high)
Stop = 24.69 (below the low of the consolidation)
Target = 28.30 (probe above the Feb. 2009 highs)
Dividend Date = approx. June 20

Notes = This setup from yesterday did not yet trigger, but remains on our watchlist going into today. See commentary in the May 27 issue of The Wagner Daily for explanation of the setup. Note that XLV is also a potential buy entry for the ETF Portfolio Tracker service as well. However, a tighter stop is used on this setup because The Wagner Daily plays are intended to be of a shorter-term nature.

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):

      SLV long (900 shares total – 700 from May 4, 200 from May 19 entry) –
      bought 13.01 (avg.), stop 14.28, target 15.82, unrealized points = + 1.57, unrealized P/L = + $1,413

      FXY long (250 shares from April 24 entry) – bought 102.41, stop 100.80, target 112.20, unrealized points = + 2.06, unrealized P/L = + $515

      SKF long (150 shares from May 20 entry) – bought 43.90, stop 41.40, no target (will trail stop), unrealized points = + 1.41, unrealized P/L = + $212

    Closed positions (since last report):


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



    • We have raised the stop in SLV to just below yesterday’s low. Since it broke out to a new nine-month high yesterday, SLV should not go back below yesterday’s low. If it does, there would be a possibility of a failed breakout and “double top” at resistance of the February 2009 high. By trailing our stop to just below yesterday’s low, we still lock in a nice gain if SLV reverses back down. At the same time, we’ve slightly raised our target price.
    • 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.
    • For those of you whose ISPs occasionally deliver your e-mail with a delay, make sure you’re signed up to receive our free text message alerts sent to your mobile phone. This provides a great way to have redundancy on all Intraday Trade Alerts. Send your request to [email protected] if not already set up for this value-added feature we provide to subscribers.

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Edited by Deron Wagner,
MTG Founder and
Head Trader