The Wagner Daily


Gapping down to open near last week’s lows, the stock market quickly trapped the bulls who bought last week’s broad market pullback to key support levels. As such, the situation rapidly deteriorated, as bulls were forced to sell their positions and the bears joined in the selling. Stocks trended steadily lower throughout the entire session, before eventually closing at their dead lows of the day. The Dow Jones Industrial Average tumbled 2.4%, the S&P 500 3.1%, and the Nasdaq Composite 3.4%. The small-cap Russell 2000 plunged 3.9%, as the S&P Midcap 400 fell 3.7%. With the exception of the Nasdaq brothers, all the main stock market indexes closed below their 50-day moving averages, for the first time in nearly three months.

Total volume in the NYSE declined 17%, while volume in the Nasdaq receded 32% below the previous day’s level. Even though volume was technically lighter in both exchanges, remember the previous day’s volume levels were artificially inflated by “quadruple witching” options expiration day. The effect of options expiration on volume levels is also the reason we cautioned against labeling last Friday’s session as a bullish “accumulation day.” Ugly market internals also prevented traders from taking solace in the deceivingly lower volume levels. In the NYSE, declining volume creamed advancing volume by a margin of 14 to 1. The Nasdaq adv/dec volume ratio was similarly negative by 10 to 1.

In yesterday’s commentary, we said, “The S&P 500 closed right at resistance of its 20-day EMA, while support of the 200-day MA is below. So far, the S&P has retraced about one-third of its loss from the June 11 high, down to the June 17 low. Unless the index retraces more than two-thirds (or a 61.8% Fibonacci retracement) of its recent pullback, we must be very cautious with new long entries, especially considering the S&P and Nasdaq just suffered three bearish “distribution days.” Rather than recovering even half of its recent losses before heading lower, the S&P 500 plunged below last week’s lows after making less than a 38.2% Fibonacci retracement. Below, this is shown on the short-term hourly chart of the S&P 500 SPDR (SPY), a popular ETF proxy for the S&P 500 Index:

It’s quite a sign of weakness that the S&P only managed to recover about one-third of its recent losses before breaking down to a “lower low.” Given the resilience of the market over the past several months, one might have expected at least a 50% retracement before seeing additional selling pressure, but overall market sentiment appears to be changing very rapidly. Supporting the change to a more bearish sentiment was the S&P 500’s breakdown below key support of both its 50 and 200-day moving averages. At a minimum, we now expect a test of the May 2009 lows, less than 2% below the current price of the index. With its three-month uptrend line already broken and a short-term downtrend firmly underway, the S&P 500 will be looking at a bearish intermediate-term trend reversal if the index forms a “lower low” by closing below its May low. On the daily chart of SPY below, the dashed, horizontal line marks that key area of price support to monitor in the coming days:

In addition to the S&P 500, the Dow Jones Industrial Average, Russell 2000, and S&P Midcap 400 indices all closed below their 50-day MAs as well. The relatively strong Nasdaq Composite and Nasdaq 100 indices remain above their 50-day MAs, but just one more day of substantial selling would change that situation.

As the short-term downtrend picks up momentum, and the main stock market indexes break down below their 50 and 200-day moving averages, several of the inversely correlated Short and UltraShort ETFs have started to look attractive. UltraShort Real Estate ProShares (SRS), which we bought on June 10 and 11, broke out and held above its 20-day EMA last week. Then, in yesterday’s broad-based weakness, it gapped up above last week’s highs and finished the day with a whopping 10% gain. On June 17, we sold half of our SRS position into strength, locking in a gain of 11%, but kept the remaining half position in anticipation of rally up to its 50-day MA. Now, with an 18% unrealized gain, the remaining half position of SRS is nearing our original price target, which was resistance of its 50-day MA. We expect to take profits on the rest of the trade within the next day or two, but will keep SRS on our watchlist for potential re-entry on a pullback or breakout of consolidation. The DJ Real Estate Index ($DJR) is one of the weakest sectors on our industry watchlist right now.

When the stock market gapped down below support of last week’s lows yesterday morning, and showed no signs of reversing, we sent an Intraday Trade Alert to subscribers, notifying them of a new, short-term buy into UltraShort S&P Midcap ProShares (MZZ). Unless it closed with a significant profit buffer, in which case we would take the trade overnight, we planned to manage the position as a daytrade. Since the S&P Midcap 500 closed at its dead low of the day, firmly below support of last week’s low, we kept MZZ overnight. Our plan is to take advantage of a sell-off down to the May lows in the major indices (which is obviously the May highs in MZZ). Because of the intensity of yesterday’s breakout in MZZ, we now can trail our stop to near the break-even level, thereby removing most risk from the trade. The dashed, horizontal line on the daily chart below marks our approximate profit target in the MZZ trade:

Over the past few weeks, we’ve been monitoring the tight, sideways range on the Financial SPDR (XLF). Yesterday, that ETF convincingly broke down below support of its 50-day moving average, after falling below its 20-day EMA on June 17. Though we don’t expect a test of the March 2009 lows in XLF, a 50% retracement of the entire upward move would not be surprising. That would put XLF around the $9.50 area, about 16% below it current price:

Those looking to take advantage of a short to intermediate-term correction in the financial sector, could obviously consider selling short XLF. But if you’re trading an IRA, or other “non-marginable” account where short selling is not permitted, you might alternatively consider buying the inversely correlated UltraShort Financial ProShares (SKF), which has just reversed to a short-term uptrend. If you’re new to trading the inversely correlated and leveraged ETFs, it’s important to realize these instruments are designed primarily for short-term trading and hedging purposes, not long-term investments (see the February 6, 2009 issue of The Wagner Daily for an explanation of this).

Today’s Watchlist:

There are no new setups in the pre-market today. With 7 open positions, a mix of bullish and bearish plays, we’re not interested in adding additional positions today. Rather, we’ll focus on managing our existing positions for maximum efficiency.

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):

      SRS long (350 shares [half position] remaining from June 10 and 11 entries) –

      bought 18.85 (avg.), stop 20.89, target 22.70, unrealized points = + 3.40, unrealized P/L = + $1,190

      MZZ long (300 shares from June 22 entry) – bought 39.75, stop 39.28, target 44.50, unrealized points = + 1.20, unrealized P/L = + $360

      IBB long (200 shares from June 8 entry) – bought 70.04, stop 67.12, target 76.48, unrealized points = (0.30), unrealized P/L = ($60)

      UNG long (400 shares from June 11 entry) – bought 15.12, stop 13.59, target 19.80, unrealized points = (0.47), unrealized P/L = ($188)

      INP long (150 shares from June 17 entry) – bought 49.08, stop 44.70, target 64.20, unrealized points = (2.90), unrealized P/L = ($435)

      DBA long (600 shares from June 17 entry) – bought 26.49, stop 25.23, target 28.78, unrealized points = (0.83), unrealized P/L = ($498)

      SLV long (700 shares total — 500 shares on June 8, 200 shares on June 11) –

      bought 14.74 (avg.), stop 13.29, target 19.12, unrealized points = (1.20), unrealized P/L = ($840)

    Closed positions (since last report):


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



    • Per Intraday Trade Alert, we bought MZZ yesterday morning. The MZZ trade, while profitable so far, is not representative of a typical trade in The Wagner Daily. A vast majority of our trades are designed for holding periods averaging 2 – 5 weeks, which is ideal for those who are not able to sit at their computers all day. However, as a value-added service to our subscribers who can benefit from trades such as MZZ, we occasionally provide a heads-up to subscribers of such very short-term opportunities. Nevertheless, if you’re not able to actively monitor the market intraday, rest assured you are not missing out on many trade opportunities with this newsletter if not able to participate in these types of trades, as they’re not that frequent.
    • Due to the gap down below our stop price, we used the MTG Opening Gap Rules to manage the DBA position. Our adjusted stop in DBA is reflected above. We’ve also trailed stops tighter in both SRS and MZZ.
    • Despite their low correlation to the direction of the broad market, the performance of our commodity ETFs has been disappointing. Though the group was showing relative strength at the time of our entries, the threat of a weaker than expected global economy means the potential for lower demand in commodities. Still, we’ll stick with our original plan by honoring the predetermined stops, and simply letting them play out as they will. Fortunately, our SRS position (of which we’ve already closed half for a nice gain), as well as our new MZZ position, are acting to balance the weakness in our bullish positions. This significantly lowers our overall portfolio risk.
    • 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