The Wagner Daily


Last Friday was another day of indecision in the major indices, as the bulls and bears battled it out in a virtual tug-of-war that resulted in neither party confirming a win. At 10 am EST, the Nasdaq Composite was trading 0.6% higher on the day, but sellers quickly took control and caused the index to completely reverse its intraday direction. By 12 noon EST, the Nasdaq Composite was trading 0.7% lower on the day. A small wave of buying crept into the final two hours of Friday afternoon’s session and reversed the Nasdaq’s direction once again. When the dust settled and the closing bell rang, the Nasdaq had basically closed flat on the day (down 2.75 points to be exact). The S&P 500 Index and Dow Jones Industrial Average both oscillated in a similar range throughout the day and both indices also closed flat. Volume increased by 12% in the NYSE and 7% in the Nasdaq, but we really cannot read too much into that, given that the broad market closed at the flat line.

Going into today, keep a close eye on the Semiconductor Index ($SOX), which began showing major relative weakness on Friday. Because the SOX index is so heavily weighted within the Nasdaq, it usually leads the intraday price direction of the Nasdaq itself. It’s quite rare for the Nasdaq to show strength without the SOX index leading the way. Furthermore, detecting early weakness in the SOX index is often a great warning sign of impending weakness in the Nasdaq. Therefore, we view the intraday strength or weakness of the SOX index as a key market internal that is on par with the importance of following other market internals such as the TICK or TRIN.

Friday’s price divergence and relative weakness in the SOX index was a major warning sign that the Nasdaq was about to lose its early gains and reverse to new intraday lows. At 10:30 am EST on Friday, the Nasdaq Composite was trading near its intraday high, with a 0.5% gain, but the Semiconductor Index was at its intraday low and already showing a loss. This divergence was the reason we sent an e-mail to subscribers, informing them we were shorting SMH (Semiconductor HOLDR), which we took short over the weekend, and now have an unrealized gain of nearly a point. If you overlay an intraday chart of the SOX index with the Nasdaq Composite, you will clearly see the early divergence that tipped us off to short SMH. So, watch the SOX index today because the Nasdaq is unlikely to rally if the SOX continues to show the weakness that began on Friday.

Looking at the daily chart of the Nasdaq Composite, the most significant technical event was last week’s “lower low” that was set when the Nasdaq broke below its February 5 low of 2,012. This was the first time since the primary uptrend began, one full year ago, that the Nasdaq set a “lower high” and subsequent “lower low.” From a pure technical perspective, the “lower high” and “lower low” on the Nasdaq means that the former primary uptrend of the Nasdaq has been violated and the index has begun to form an intermediate-term downtrend. In order to gauge where the Nasdaq is likely to find its next major price support, you need to look at the longer-term weekly chart.

On the weekly chart, you will notice that the Nasdaq has closed with its sixth consecutive week of losses. It was also the first week since the primary uptrend began in March 2003 that the Nasdaq Composite spent the entire week below support of its 10-week moving average. Both the 10-week and 200-week moving averages now stand overhead as resistance. The weekly chart of the Nasdaq Composite below illustrates this:

Based on the weekly chart, it appears the next major support for the Nasdaq is the prior “swing low” around the 1,880 level, which was set in December of last year. This prior low is also near the convergence point with the 40-week moving average, which is currently at 1,867. The 2,000 level acted as support in the Nasdaq for several consecutive days last week and could easily do so again this week. However, if last week’s low of 1,991 is broken, we expect the Nasdaq to eventually sell off down to its next primary support level around the 1,880 area.

Both the S&P 500 Index and Dow Jones Industrial Average have been showing a surprising resilience to the weakness in the Nasdaq Composite. Unlike the Nasdaq, the weekly chart of the S&P still shows a sideways consolidation near its 52-week highs. A multi-week consolidation near a 52-week high is generally considered to be bullish and often results in a breakout to new highs. However, I would be quite surprised if this happens without the Nasdaq first reversing its weakness. A more likely scenario is for the S&P to sell off in order to “catch up” to the relative weakness in the Nasdaq. Anticipation of this occurrence is the reason we have been shorting both SPY (S&P 500 Index) and DIA (Dow Jones Industrial Average), albeit not very successfully yet.

Today’s watch list:

There are no new plays for today, as we already have three open positions (see details below).

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 (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:

    SPY short (HALF position, from Feb. 24) –
    shorted 114.31, covered 115.42, points = (1.11), net P/L = ($114)

    DIA short (full position, from Feb. 24 and 26) –
    shorted 105.79 (avg.), covered 106.59, points = (0.80), net P/L = ($166)

Open Positions:

    SMH short (from Feb. 27) –
    shorted 41.70, new stop 41.70, target 40.70, unrealized points = + 0.80, unrealized P/L = + $120

    SPY short (re-entry, from Feb. 27) –
    shorted 114.94, new stop 115.85, target 113.20, unrealized points = (0.08), unrealized P/L = ($16)

    DIA short (re-entry, from Feb. 27) –
    shorted 105.92, new stop 106.76, target 104.30, unrealized points = (0.15), unrealized P/L = ($30)


Per intraday e-mail alert, we shorted SMH on Friday and have updated the stop as per above. We also re-shorted SPY and DIA after getting stopped out. In the event of a gap up today, remember to use the MTG Opening Gap Rules to manage the short positions in SPY and DIA. This means we will adjust our stop to over the 20-minute high if they gap up and trade at or above their stops on the open.

Edited by
Deron Wagner,
Founder and President