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The Wagner Daily


Commentary:

Conditions looked pretty ugly for the bulls across the board yesterday morning, but the buyers stepped up to the plate during the afternoon and the major indices closed with a reversal of all the morning losses. As you may recall, the S&P 500 Index broke below major support of its 50-day moving average last Friday, which was likely an impetus for the sharp selloff during the morning session. Unlike many of the previous days, yesterday morning’s selloff was broad-based, as the S&P, Dow, and Nasdaq each traded approximately 1.5% lower as of their intraday lows around 10:30 am EST. The Dow also joined the S&P by trading below its 50-day moving average on an intraday basis for the first time since March 31. The Nasdaq Composite showed the most relative weakness in the morning with the Biotech, Internet, and Software sectors all getting hit pretty hard. Relative strength was once again found in the SOX (Semiconductor) Index, as well as the T-bond ETFs (TLT, IEF, and SHY).

Despite how nasty things looked in the morning, the broad market began finding support as it entered the mid-day doldrums. Several institutional buy programs subsequently kicked in and pushed the TICK reading above 1000. The buying momentum fed on itself, causing each of the major indices to reverse their early losses and close near the flatline. The Dow showed the most strength during the afternoon reversal and managed to close with a 0.4% gain, the S&P closed 0.3% higher, but the Nasdaq Composite closed basically flat on the day (down 0.1%). Unfortunately, volume was nothing exciting during the reversal and declining volume still outpaced advancing volume in the NYSE. Advancing volume beat declining volume in the Nasdaq by only 1.5 to 1.

With the major indices recently breaking support of key moving averages, what caused the buyers to step in and reverse the morning downtrend? It seems that several buy programs kicked in shortly after the S&P broke below the lows of its recent consolidation, as if several institutions were allowing the major indices to drift below the consolidation support in order to step in and buy at the best price. On the daily chart of the S&P 500 Index below, notice how the index traded below the consolidation zone intraday, but the afternoon reversal put the S&P back into the prior range:

On the chart above, notice how the candlestick of July 1 looks very similar to yesterday’s in that it probed below support, formed a long tail, and closed above the consolidation. This subsequently led to higher prices over the next several days. Will we have a repeat this time as well? Well, it is quite possible that we will see similar follow-through to the upside, but there is one key difference this time — the S&P is now trading BELOW its 50-day moving average, but it was not on July 1. In fact, notice how yesterday’s high in the S&P was exactly equal to resistance of the 50-day moving average. Although the S&P rallied sharply, there was not enough momentum to pierce back above that level. Therefore, IF, and only IF, the S&P can get back above its 50-day MA, I would take a shot at SPY on the long side. Otherwise, be careful because that 50-day MA is likely to continue acting as strong resistance.

Yesterday was a classic “reversal day” in which the indexes resumed the direction of the previous trend during the morning session, but reversed the trend in the afternoon. In this case, the major indices resumed the downtrend that began at the end of last week, but reversed and rallied in the afternoon, closing near the highs of the day. Yesterday’s reversal day created long “shadows” or “tails” on the daily candlestick charts of the major indices. In the case of the Nasdaq Composite, a perfect “long-legged doji” candlestick was formed. I have circled the “long-legged doji” candlestick on the chart of the Nasdaq below:

Did you also notice on the chart above that 1685 perfectly acted as support for the Nasdaq Composite yesterday? Notice how 1685 was clearly the resistance in mid-June, but that level acted as the new support level yesterday (and also on July 25). This is a clear example of a fundamental theorem in technical analysis — prior resistance becomes the new support level once the resistance is broken (and vice versa). Also notice how the 20-day MA is now acting as overhead resistance for the Nasdaq Composite. Yesterday’s high in the Nasdaq was the 20-day MA, just as the 50-day MA marked yesterday’s high in the S&P.

While it is likely that we see follow-through to the upside today, I have shown you that breaking through both the 20-day MA on the Nasdaq and the 50-day MA on the S&P is going to require some heavy buying volume. Without it, there is a good chance the market will continue to chop around in yesterday’s range. But, if we can clear yesterday’s highs, and correspondingly the moving averages, I think it is a good bet to test the waters on the long side, but with reduced share size. Shorting might be a bit tricky here, as demonstrated by yesterday’s reversal. Cisco (CSCO) reports earnings after the close today, which is likely to be a market mover for tomorrow. Remember to always use stops in case you’re wrong. Most importantly, TRADE WHAT YOU SEE, NOT WHAT YOU THINK!


Today’s watch list:

There are no new plays for today. We will instead focus on managing the SMH position and will send alerts with any changes.


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:

    SMH long (from Aug. 4) –
    bought 32.83, new stop at 32.30, target of 35.90,
    unrealized points = + 0.02, unrealized P/L = + $6

    EWJ long (full position from July 15 – 17) –
    bought 7.81 (avg.), new stop at 7.34, target of 8.80,
    unrealized points = (0.34), unrealized P/L = ($272)

Notes:

Per an intraday e-mail alert, we lowered the buy trigger on SMH and bought at 32.83 and are still long EWJ as well. We are also long SPY, DIA, and TLT, per calls made in the ETF Real-Time Room, and the results of those trades will be reported in the weekly newsletter.

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)


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.


Yours in success,

Deron M. Wagner

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