Commentary:

Like the previous day, yesterday was another day of clear divergence
between the S&P 500 and the Nasdaq. Once again, the S&P showed
significantly more relative strength than the Nasdaq. In what could best be
described as an uneventful and sloppy uptrending day, the S&P 500 and Dow
both closed approximately 0.72% higher, while the Nasdaq Composite once again
closed flat on the day. Total market volume was uneventful in both the NYSE and
Nasdaq, and came in below the previous day. Advancing volume beat declining
volume by a positive margin of 1.59 to 1 in the NYSE. However, volume breadth
was negative in the Nasdaq as declining volume outpaced advancing volume by 1.72
to 1. This divergence between the volume breadth clearly confirmed the price
divergence between yesterday’s strength in the S&P and weakness in the
Nasdaq. To illustrate yesterday’s divergence between the major indices, take a
look at the intraday charts I have annotated for you below. The first is a
15-minute chart of SPY (S&P 500 Index) and the second is of QQQ (Nasdaq 100
Index):

In the chart of SPY above, notice how the index was in an uptrend the
entire day (despite the sharp retracement at 2:30 pm EST). Notice also how SPY
rallied into the final hour and closed at the previous day’s high. In sharp
contrast, take a look at the same time interval of QQQ:

Do you immediately notice a large divergence? Unlike SPY, which rallied
to close near the previous day’s high, QQQ barely retraced more than 50% of the
previous day’s selloff at its high point in the late morning session. Then,
while SPY rallied to close at the highs of the day, QQQ barely bounced and was
not able to break above its late morning high. While SPY formed an intraday
uptrend, the Nasdaq formed a downtrend from the high of the previous day.
Looking at these two charts, it is very apparent that the S&P has been
leading, while the Nasdaq has been lagging over the past several days. As I
mentioned yesterday, your job each day is to spot the divergence and buy the
indexes and sectors with the most relative strength or short those with the most
relative weakness. By doing so, you will consistently be putting the odds in
your favor by not fighting the trend of the security you are trading.

Hopefully you paid attention to the sectors that were showing relative
strength yesterday because there were clearly several leaders that outpaced the
broad market. As we predicted, both the Oil Services (OIH) and Energy/Utility
(XLE) sectors were very strong, leading the market with gains of 4.27% and 2.50%
respectively. Pharmaceuticals also showed relative strength yesterday with a
2.3% gain in PPH. Technology-related sectors such as Semiconductors, Software,
and Internets again showed relative weakness, although none of those sectors
sustained significant losses yesterday.

SPY has horizontal price
resistance at 98 on its daily chart and has convergence of the 20 and 50-day
moving averages around 99. Expect both of those levels to act as key
support/resistance levels today. DIA (Dow Jones) closed back above its 50-day MA
yesterday, but has resistance of its 20-day just overhead. Since the Nasdaq has
been showing relative weakness to the S&P for the past several days, it is
likely that we will begin seeing gradual sector rotation out of the S&P and
back into the Nasdaq either today or tomorrow. We have found that sector
rotation typically lasts for a period of three days before you begin to see
money flow into a different sector. Therefore, be on the lookout for strength in
the technology sectors today, as well as the Biotechs. QQQ may be a long play if
it breaks above the upper channel of the two-day downtrend illustrated on the
chart above.

If you have not already done so, I recommend you carefully
read yesterday’s Wagner Daily, particularly the part about weekly charts.
The more I study the weekly charts, the more it seems that the broad market will
likely eventually make at least one more valiant attempt at re-testing its June
highs, despite modestly bearish daily charts. The tricky part, however, is
determining when that rally attempt will occur. Remember that August is
typically a choppy and indecisive month in the broad market because many of the
big players on Wall Street are taking some time off and therefore not actively
participating in the markets. This is likely to cause choppiness in both
directions over the next month, so you may want to trade with reduced share size
on both the long and short side. Most importantly, focus on trading individual
sectors with relative strength or weakness rather than the broad-based ETFs.
Although there will be some days in which the broad market trends well intraday,
the majority of the days this month are likely to be range-bound and choppy.
Therefore, sector trading puts the odds in your favor.

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Today’s watch list:

BBH – Biotechnology HOLDR
Long

Trigger = above 127.60
(above yesterday’s high)
Target = 129.30 (resistance of 40-MA/60 min.)

Stop = 126.70 (below yesterday’s close)

Notes = BBH has put in two
doji star candlesticks on the daily chart, indicating a bounce is likely here.
But, we will only buy on a break above yesterday’s high, which would confirm the
reversal. Remember that BBH has a multiplier ratio of only 0.5, based on the MTG Position Sizing
Model. This means that your share size of BBH should be small in order to
compensate for its volatility.

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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:

XLE long (full position from Aug. 7) –
bought 23.37, new stop at 23.40,
target of 24.00, unrealized points = + 0.41, unrealized P/L = + $246

EWJ long (full position from July 15 – 17) –
bought 7.81 (avg.),
stop at 7.34, target of 8.80, unrealized points = (0.33), unrealized P/L =
($264)

Notes:

We bought XLE per yesterday’s
newsletter and took the position overnight. So far, we have a solid unrealized
gain and will probably sell into strength today as XLE approaches our price
target. We will send an update when/if we sell today. EWJ started to finally
turn the corner back up and we remain long a full position of 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