Commentary:

The major indices each closed firmly higher yesterday thanks to a strong rally that began after the Feds announced their decision on interest rates at 2:15 pm EST. As you probably already know, the FOMC announced there would be no change in interest rates and was prepared to maintain an easy bias in the near future. Traders apparently interpreted this as positive news for the stock market and they bought heavily into the final ninety minutes of trading. The Nasdaq had the most relative strength in the beginning of the day, but all the major indices participated in the afternoon rally. Biotechs in particular were strong, as were most technology sectors. Overall, it was a broad based rally in which nearly all sectors participated. Volume increased over the prior two days, which was a positive. However, volume in the NYSE was still light overall and came in 20% below its 50-day moving average of 1.368 billion shares. The Nasdaq volume fared about the same. Nothing impressive in the volume department.

Despite the breaks of key price support last week, the S&P 500 Index recovered yesterday and is now trading back above both its 20 AND 50-day moving averages. The bounce in the Nasdaq yesterday put the index back above its 50-day moving average, but it is still trading below its 20-day MA. Interestingly, the Dow Jones Industrials Average is very close to making a new 52-week high and closed less than 50 points below its prior high of 9352 that was set on June 17. It was also one of the only major indices that was showing relative strength after it broke its 50-day moving average. The daily chart of the Dow below shows how the index closed near its prior high, a pretty impressive feat given the recent light volume:

As you can see, the Dow formed a perfect double top at the 9360 area during its last break out attempt on July 31. Because of the light volume, we are likely to see a triple top at that same level in the coming week. If it does break out to new highs, I would not trust it unless volume correspondingly surges.

If you have been paying close attention to our discussion of the importance of weekly charts over the past several weeks, this should not be surprising to you. Remember that not a single one of the major indices ever came close to breaking below support of its 20-week moving average, nor did any 20-week moving averages ever form a bearish crossover below the 50-week moving average. Therefore, the weekly uptrend line provided the necessary support for the broad market to bounce significantly as the major indices approached their 20-week moving averages. Because the weekly time interval is more powerful than a daily time frame, the bearish patterns that were formed on the daily charts were overpowered by the bullish continuation of the weekly charts.

Now that the weekly charts have provided a strong bounce in the major indices, what happens now? Does this mean the broad market will break through above the prior highs that were set in June? It’s not likely, at least not in the short-term. Breaking to new highs requires strong increases in volume in order to absorb and eat through the selling volume that is created by those who previously bought near the prior highs and now just want to “get out even.” Since we remain in the middle of the traditionally slow period of August, we are not likely to see any strong increases in volume during the next 4 weeks. As an example, look at how light yesterday’s volume was, despite the rally. However, there does not seem to be any serious selling pressure either. This means we are likely to have an equilibrium of buyers and sellers, which typically creates sideways, range-bound trading. If I am wrong, that would be great because we would all have more trading opportunities! I just recommend you maintain a low profile, despite yesterday’s rally, and continue trading with reduced share size unless a clear break of the prior highs is achieved. Going into today, I would expect to see a correction because the major indices are now bordering on overbought territory. As always, we will let the market’s action determine our directional bias, but we are expecting to be mostly on the short side today or perhaps even in cash if the market is choppy.

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Today’s watch list:

DIA – DIAMONDS (Dow Jones Industrial Avg. Tracking Stock
Short

Trigger = shorting into any opening gap up (fading the gap) OR below 92.90
Target = 91.30 (61.8% Fibo retracement of the recent rally)

Stop = 93.90 (if shorting the opening price) or 93.32 (if shorting below 92.90 trigger)

Notes = We still like this as a short setup and it did not trigger yesterday. Given the upcoming test of major resistance, we like the risk/reward ratio to short into this resistance level. If we are wrong, we will be out with a small loss. But if we are right, we stand to reap large gains by getting short at the top of its resistance.

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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:

EWJ long (1/3 position size from July 15 – 17) –
bought 7.81 (avg.),
sold 7.63, points = (0.18), net P/L =
($56)

Open Positions:

EWJ long (2/3 position size from July 15 – 17) –
bought 7.81 (avg.),
stop at 7.34, target of 8.80, unrealized points = (0.17), unrealized P/L =
($91)

Notes:

Per intraday e-mail alert, we sold 1/3 of the EWJ long position into strength yesterday, simply in order to reduce our overall risk exposure on the position. However, we remain bullish on EWJ in the intermediate term and are still long 2/3 position size (which is approximately 500 shares based on the MTG Position Sizing
Model).

The DIA short setup from yesterday did not hit our trigger price, although one trade printed at our trigger price on the third market, outside the spread.

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