Commentary:

The major indices followed through to the downside on Friday as the
broad market resumed the bearish reversal pattern that began the previous day.
Upon the release of nine different U.S. economic reports on Friday morning, the
major indices sold off sharply within the first hour of trading. However, rather
than settling into an intraday downtrend, the broad market traded sideways in a
very narrow range for the remainder of the day. In fact, the major indices
remained flat right up until the closing bell. This made it difficult to profit
from intraday trades in the broad market unless you immediately sold short
during the first hour of the session. SPY (S&P 500 Index) and DIA (Dow Jones
Indu. Avg.) both closed at their lows of the week, but QQQ (Nasdaq 100 Index)
once again showed slight relative strength and closed slightly above its
intra-week lows. IWM (Russell 2000 Small-Cap Index) showed the most relative
weakness of the broad-based indices and closed 1.4% lower on the day.
Interestingly, there was relative strength in SMH (Semiconductor HOLDR), which
closed nearly 1% higher on the day. Since the Semiconductor Index usually
leads the broad market due to its heavy weighting, it is important to be aware
of this divergence because it indicates the broad market is not likely to trade
much lower in the short-term as long as the SOX Index remains strong. We
recommend you keep a close eye on the Semis going into this week because it is
often an accurate leading indicator of broad market direction.

Despite
Friday’s apparent broad-market weakness, total volume was relatively light.
Volume in the NYSE was 19.4% lower than the previous day, while volume in the
Nasdaq was 18.7% lower. The Nasdaq closed on its lightest volume day of the
week. The lighter volume confirmed the lack of direction after the first hour of
trading. Declining volume outpaced advancing volume by a ratio of nearly 3 to 1
in the NYSE, but only 1.5 to 1 in the Nasdaq. Other market internals such as the
TICK and TRIN were mixed on Friday and not many clear signals were given by
those indicators. Overall, Friday was weak (except for the semis), but this was
exclusively due to the knee-jerk selloff during the first hour of trading;
market internals did not confirm excessive selling.

The most significant
technical event that occurred on Friday was that SPY (S&P 500 Index) closed
below its 50-day moving average for the first time since March 31, over four
months ago. Although SPY traded through its 50-day MA on an intraday basis
several times during the previous week, it was the first time that SPY had a
closing price below it. Does this mean the party is over and the mini-bull
market is done? Well, it’s too early to declare that because the Nasdaq and Dow
are both holding up relatively well and have not yet confirmed the break of
their respective 50-day moving averages. Furthermore, the fact that we are in a
traditionally slow period of trading prevents me from placing too much trust in
breakdowns OR breakouts right now. It is also common for an index to break below
a key moving average level for a few days before sharply reversing and setting
new highs. Nevertheless, we recommend you keep a close eye on the 50-day moving
average of SPY this week because caution is certainly warranted on the long
side. The chart below illustrates how SPY closed below its 50-day MA for the
first time since March 31:

DIA (Dow Jones) continues to show relative strength to the S&P and
has not yet even confirmed a break below its 20-day moving average. Although the
Dow is much more narrow-based than the S&P, this indicates that the
large-cap blue chips are seeing positive money flow. Notice how DIA closed right
on its 20-day moving average on Friday and is still well above its 50-day MA.
This indicates relative strength to the S&P:

QQQ (Nasdaq 100) closed below its 20-day moving average on Friday, but
is still above its 50-day MA. As you can see, QQQ spent the entire week in a
narrow, sideways range:

On a different note, let’s talk about Japan and the Nikkei. As you
probably know, our most profitable trade of the year (so far) resulted from a
long position in EWJ in which we netted a gain of 11% in the beginning of July.
After taking profits, we began looking for a point to re-buy EWJ on a price
correction (retracement). After seeing that correction, we began building a long
position in EWJ during the middle of July and ended up with an average price of
7.81, which represented nearly a 4% correction off the highs. Although we
initially felt comfortable with the re-entry price of 7.81, it seems (in perfect
hindsight) that our timing was a little bit early. We still remain very bullish
on the Nikkei and EWJ over the intermediate-term, but the trade has gone a bit
against us because our re-entry price was too high. Obviously, this happens all
the time and is just part of the trading business. Nevertheless, we are going to
give EWJ a little more “wiggle room” and lower the stop a few cents because,
after doing further analysis, we feel very confident that EWJ will find support
at its current price area and begin heading back up to eventually set new highs.
Primarily, we feel confident because EWJ is still above its 50-day moving
average, which also perfectly converges with the first Fibonacci
retracement level of 38.2%. Also, notice how light the volume has been
during the selloff in EWJ relative to the buying volume during the beginning of
July. This indicates there is not a mad rush out the exits:

It is very powerful when a major Fibonacci level converges with a major
moving average level such as the 50-day because the convergence creates powerful
support. We would be very surprised if EWJ breaks below this level, but if it
does, we will certainly take the stop without question. We are not about to
forgo our usual strict discipline of sticking to stops, but we do feel it is a
good risk to loosen the stop on EWJ a bit because of the moving average and
Fibonacci convergence shown above, as well as the light selling volume.
Obviously, you need to make your own decision whether to bail out of EWJ now or
whether to give it a looser stop. I am simply explaining our technical rationale
for why we personally are remaining with our long position and giving EWJ a
looser stop.

Going into today, remember to keep an eye on that 50-day
moving average of SPY because that is likely to set the eventual tone for the
rest of the major indices. It could easily pop right back above it OR it could
collapse from here. Too hard to make a call on it right now, but watch it
closely. Also remember to follow the SOX index because we are likely to see some
follow-through to the upside from Friday’s strength. Cisco (CSCO) reports after
the close on Tuesday, which will be a potential market mover, but remember we
remain in the summer doldrums. Don’t get too carried away on either side of the
market right now and remember that you probably have a better risk/reward by
trading the individual sectors rather than the broad-based ETFs.

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Today’s watch list:

SMH – Semiconductor HOLDR
Long

Trigger = above 33.05
(above Friday’s high)
Target = 35.90 (upper channel of weekly uptrend)

Stop = 32.40 (below breakout level)

Notes = Looking to buy a
breakout in SMH due to its recent relative strength. SMH has been forming an
ascending triangle on the daily chart and we are looking for it to
follow-through to the upside.

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Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from
The Wagner Daily (ETF Intraday Real-Time Room trades are reported
separately in The Wagner Weekly). Net P/L figures are based on the
quantity of shares represented in the MTG Position Sizing
Model.

Closed Positions:

(none)

Open Positions:

EWJ long (full position from July 15 – 17) –
bought 7.81 (avg.), new
stop at 7.34, target of 8.80, unrealized points = (0.30), unrealized P/L =
($240)

Notes:

We did not enter any new positions
from The Wagner Daily last Friday, but we did buy OIH per a call in the
ETF Real-Time
Room and it is working well so far. Also, see the commentary above for
explanation of new stop on EWJ.

Click here for
a detailed explanation of how daily trade performance is calculated.

Click here for a detailed
cumulative report of MTG’s trading performance (updated weekly)

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Glossary and Notes:

Remember that opening gaps that cause stocks
to trigger immediately on the open carry a higher degree of risk because the
gaps (both up and down) often do not hold. Use caution if trading stocks with
large opening gaps.

Trigger = Exact price that stock must trade
through before I will enter the trade. If a long position, I will only enter the
stock if it trades at the trigger price or higher. For a short position, I will
only enter the stock if it trades at the trigger price or lower. It is really
important to only enter the position if the trigger price is hit, otherwise the
trade becomes riskier.

Target = The anticipated price I am
expecting the stock to go to. However, this does not mean that I will
always hold the stock to that price. If conditions warrant, I will sometimes
take profits before that price, in which case I will notify you of the
change.

Stop = The price at which I will have a physical stop
market order set. As a position becomes profitable, this stop price will often
be adjusted to lock in profits. Again, you will always be notified of such
changes in the next daily report or intraday if you subscribe to intraday
updates.

SOH = Sit On Hands (Don’t Make Trades)

Closed P&L
under Deron’s Report Card is based on the actual price I closed my trade at, not
just the theoretical target or stop price listed for each stock. Open P&L is
based on the closing prices of the most recent trading day.

Unless
otherwise noted, average holding time is 1 to 3 days once a position is
triggered. Updates on open positions are provided daily.

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Yours in success,

Deron M. Wagner