The Wagner Daily


Getting off to a negative start, the major indices gapped substantially lower on yesterday’s open, then chopped around in a horizontal range throughout the entire session. Stocks finished with significant losses, but the broad-based decline was fully the result of losses sustained in the opening minutes of trading. The Nasdaq Composite fell 0.8%, as both the S&P 500 and Dow Jones Industrial Average shed 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 1.0% and 0.8% respectively. The S&P and Dow closed around the bottom quarter of their intraday ranges. The Nasdaq settled just below the middle of the day’s range.

The most negative facet of yesterday’s trading was higher turnover across the board. Total volume in the NYSE increased 11%, while volume in the Nasdaq was 5% higher than the previous day’s level. The losses on higher volume caused both the S&P 500 and Nasdaq Composite to register another bearish “distribution day.” In both indexes, it was the fifth such day of institutional selling within recent weeks. A healthy market can typically absorb the pressure of a few days of selling amongst mutual funds, hedge funds, and other institutions, but five or more “distribution days” within a one-month period often leads to a substantial correction in the broad market. Nevertheless, there have been a few “accumulation days” (higher volume gains) within this period, and most of the “distribution days” have occurred on lighter than average volume. However, the five “distribution days” are still a yellow warning flag to astute bulls.

Yesterday, we closed two of our three open positions, both for nice gains. The first was our short position in Oil Service HOLDR (OIH), which we closed for a gain of more than 8 points in just a five-day period. We originally sold short OIH after it fell below support of its weekly uptrend line, as well as its 50-day moving average, then failed to recover back above it. We took profit on the trade yesterday, when OIH hit our original downside price target of $110.60. The daily chart of OIH below shows our entry and exit point:

The other trade we closed yesterday was our short position in Regional Bank HOLDR (RKH). It seems the relative weakness that has been holding down the financial sector may be diminishing. RKH also came into support of its recent lows on the daily chart, so that gave us another reason to take profits on the trade. We locked in a gain of more than 2 points on the RKH short trade, but we will continue to monitor the action in the financial sector for potential short re-entry, depending on market conditions.

The Semiconductor HOLDR (SMH), which we’ve been stalking for potential buy entry, pulled back slightly yesterday, but we’d still like to see a retracement down to the area of its breakout level (around $26.35) before buying. Of course, there’s the possibility such a pullback may never come, but we’re not inclined to chase long entries in the current market environment. Waiting for stocks and ETFs to come to our intended entry prices, and passing on them if they don’t, enables one to more easily control risk in the currently choppy conditions. The potential buy entry into SMH is shown on the daily chart below:

We recently bought First Trust Natural Gas Index (FCG) when it broke out above a month-long downtrend line, but sold it for a small loss when it failed to follow-through to the upside. Now, FCG is actually looking like a potential short setup. Take a look:

If FCG breaks below yesterday’s low, it will lose support of a significant area of horizontal price support. If that occurs, the next area of support is around the $14 level. In that area, there is support of the 200-day moving average, as well as the weekly uptrend line from the March 2009 lows. Because the potential profit target for a short entry into FCG is relatively small, this setup should only be considered by short-term traders. Furthermore, it’s crucial that a short entry is not attempted unless FCG breaks below yesterday’s low. Since there is big support at the current price level, FCG could just as easily zoom higher from its current price, if yesterday’s low holds up.

Despite yesterday’s losses, the S&P 500 remains stuck in the same sideways range of the past four weeks. Although the index slipped below support of its 20-day exponential moving average yesterday, the S&P is now approaching lower channel support of the recent range, around the 1,086 area. More important support of the 50-day moving average also lies just below the lower end of the range, at the 1,080 level. Check out the short-term hourly chart of the S&P 500 below:

Notice how the S&P is once again approaching the lower channel support of its recent range. This implies the broad market is no longer short-term “overbought.” As such, odds may favor an upward bias over the next few days. However, all bets are off on the long side of the market if the S&P convincingly breaks down below the lows of its month-old trading range. We continue to believe the best overall plan of action right now is for short-term traders to be positioned lightly on both sides of the market. Intermediate-term traders may prefer to simply wait on the sidelines for broad market trend resolution in either direction.

Today’s Watchlist:

Semiconductor HOLDR (SMH)

Shares = 200
Trigger = pullback to $26.40 (retracement to support of breakout level)
Stop = $24.58 (below recent “swing low”)
Target = n/a (will trail stop)
Dividend Date = n/a (individual stocks pay dividends at various dates)

Notes = See commentary above for explanation of the setup. Note the new trigger price of $26.40, not $26.30.

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.

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  • Per Intraday Trade Alert, we made a judgment call to lock in profits on the RKH short position with a tight trailing stop that hit yesterday. We also automatically covered OIH for a nice gain, after it hit our original target price. Remember that initial risk on OIH was limited to just $300 (half position size), so the gain of more than $800 was rather nice, considering it was just a half position.
  • 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