The Wagner Daily


The indecisive, range-bound chop of the preceding several days resolved itself yesterday, as the main stock market indexes made a decisive move. Unfortunately for the bulls, the break of the range was to the downside. A worse than expected Consumer Sentiment reading sparked a swift drop after the first thirty minutes of trading. Thereafter, stocks continued lower into mid-day, then found a bit of support in the afternoon. The Dow Jones Industrial Average lost 1.0%, the S&P 500 1.2%, and the Dow Jones Industrial Average 1.3%. The small-cap Rusell 2000 snapped its nine-day winning streak with a 1.1% decline. The S&P Midcap 400 shed 1.3%. All the major indices finished just off their lows of the session. Yesterday was the biggest average percentage decline in the broad market since February 4, one day before the recent “swing low” support levels were established.

Turnover climbed across the board, causing both the S&P and Nasdaq to register a bearish “distribution day.” Total volume in the NYSE swelled 14%, while volume in the Nasdaq rose 19% above the previous day’s level. The higher volume losses pointed to broad-based selling amongst mutual funds, hedge funds, and other institutions. Ugly market internals confirmed the bearishness. In the NYSE, declining volume exceeded advancing volume by a margin of nearly 7 to 1. The Nasdaq adv/dec volume ratio was negative by approximately 5 to 1.

For the past four days, we’ve been patiently waiting for a low-risk entry point to initiate a near-term short position in the broad market. For three days in a row, we were ready to take a bearish position, but each time our trigger price of breaking the previous day’s low did not hit. That patience prevented us from getting short too early and kept us out of trouble. Yesterday, however, our patience paid off, as we finally got the entry point we’ve been waiting for. Upon spotting the confirmation of higher volume as stocks broke support in the morning, we shorted the Nasdaq 100 Index (QQQQ), via a long position in ProShares Short Nasdaq 100 (PSQ), a non-leveraged “short ETF” that inversely tracks the price of QQQQ. Our entry into PSQ coincided with QQQQ breaking below support of the lows of its very short-term trading range, as well as a breakdown below the 20 and 40-period moving averages on the hourly chart. Our entry is annotated on the hourly chart below:

Just because we entered a new short position does not mean we’ve suddenly become bearish on the market. Rather, we’re simply looking to play the momentum of a short-term pullback off the February 5 lows. If selling momentum really kicks in, it’s entirely possible stocks could fall to test support of their February 5 “swing lows,” our ultimate downside target. However, it may be more likely that the major indices do a Fibonacci retracement of 50% to 61.8% of their recent gains, then attempt to head back up again. Closing at its 20-day exponential moving average, QQQQ has so far retraced about a quarter of its rally off the February 5 lows. Regardless of how deep the correction carries stocks, we will manage this short position closely, through the use of trailing stops, because we only intended it to be a short-term trade. In addition to daily updates in this newsletter, we’ll keep subscribers updated, on an “as-needed” basis, through the use of Intraday Trade Alerts.

Shortly after yesterday’s open, we dipped a toe in the water with another “short ETF,” ProShares UltraShort Emerging Markets (EEV). As with the PSQ trade, we’re only looking for a quick “pop” in EEV, and will carefully manage the position with a short-term horizon. The daily chart of EEV below illustrates our buy entry, just above the highs of the tight, four-day consolidation, with the 50-day moving average providing support below:

It may soon be time to take profits on U.S. Dollar Bull Index (UUP), a currency ETF we’ve been long for the past six weeks. Although UUP closed at its highest level since July of 2009 yesterday, the pattern on its daily chart shows it may be time for a period of consolidation. Take a look:

The biggest problem with this chart is the February 19 action, where UUP gapped open well above the range, but sold off intraday to close right at the breakout level. After not doing much the following day, UUP crawled its way back up yesterday, but now must contend with overhead supply from the February 19 high. This puts UUP in danger of a failed breakout, and gives us a valid reason to now trail our stop tightly. While UUP may be in good shape if it gaps back above the February 19 high and holds, we’re now moving our stop to just below yesterday’s low, in order to maximize our gains, and get out near the top, in the event UUP slides back down.

Over the past week, we’ve been reminding subscribers of the dangers of light volume rallies, such as the present advance off the February 5 lows. Specifically, we’ve said that just a single day of higher volume selling (aka “distribution”) can wipe out days of gains that were made on declining volume. Yesterday’s action was a good example of this, as the major indices erased four days of gains in just one session. While stocks made a statement with yesterday’s high volume break of support, the degree of downside follow-through remains to be seen. Certainly, it’s imperative to observe protective stops on any long positions right now. However, it’s equally important to avoid complacency with any new short positions you may have entered. Stay alert and remember to trade what you see, not what you think.

Today’s Watchlist:

There are no new setups in the pre-market today. On the long side, we continue to monitor IBB and DGP (which undercut support of its range yesterday). If any new trades are entered, an Intraday Trade Alert will be promptly issued.

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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  • The pre-market setup in PSQ triggered for buy entry, as did our EEV setup via Intraday Trade Alert. For now, we’re keeping the original stops in place, but both positions will be closely monitored, with protective stops being raised as market conditions allow.
  • Note the new stop in UUP, just below support of yesterday’s low.
  • 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