The Wagner Daily


After beginning yesterday with an opening gap down, the broad market suffered another morning of heavy selling and trended lower. But, due to the proximity of the prior lows from March, the major indices showed signs of finding support in the afternoon and closed in the middle of their intraday ranges. The S&P 500 and Nasdaq Composite both closed 1.1% lower, while the Dow once again showed the most relative weakness and closed 1.3% lower. The Dow also closed below the 10,000 level and below its 200-day moving average for the first time since March of 2003. Total market volume increased by 12% in the NYSE and 16% in the Nasdaq, which made yesterday another “distribution day.” Breadth was quite negative again, as declining volume outpaced advancing volume by a margin of 9 to 1! The selling was very broad-based, as nearly every sector we follow closed in the red. The one exception was the Gold and Silver mining sector ($XAU), which closed with a 2.4% gain. The Semiconductor Index ($SOX) also showed signs of relative strength and closed flat. The Oil and Oil Service sectors were hit hard yesterday and broke down on their daily charts.

As we have been anticipating for the past two weeks, each of the major indices broke below their prior lows from March during yesterday’s trading session. This means that, since the 52-week highs that were set earlier this year, both the S&P 500 Index and Dow Jones Industrial Average have both set two “lower highs” and “lower lows” on their daily charts. This means the primary intermediate-term trend on both of these indices is now “down.” The Nasdaq Composite, meanwhile, has been in a downtrend since January of this year. Although the prior lows from March were broken on an intraday basis, mild buying into the close caused each of the indices to close at or above their prior lows. This sets up the possibility for a double bottom, or at least a short-term bounce, to be formed at the prior lows of March. The daily chart of the S&P 500 Index below illustrates how the index traded below its March low on an intraday basis, but closed exactly at the low. Notice how the 200-day moving average, which is a very important support level, is now directly below yesterday’s low in the S&P:

The Dow Jones Industrial Average also traded below its prior lows from March, but the Dow actually closed a few points below the prior low. Furthermore, the Dow also closed below its 200-day moving average, which has converged with the March low. As we mentioned a few weeks ago, it’s not unusual for an index to pierce below its 200-day MA, but then bounce back over the next day or two. Rarely will an index collapse through its 200-day moving average without at least attempting to bounce for a few days. Interestingly, both the prior low of March and the 200-day MA on the Dow are just above the “psychologically important” 10,000 level, which the Dow closed below yesterday. Nevertheless, it seems likely the Dow will at least attempt to bounce back above the 10,000 level over the next day or two. Whether it actually goes anywhere or not is another story, but it should at least bounce in the short-term. The daily chart of the Dow below illustrates the convergence of the 200-day MA with the prior low from March:

Like the S&P 500, the Nasdaq Composite Index also closed yesterday exactly at its prior low from March. However, the S&P 500 Index is still above its 200-day MA, while the Nasdaq is well below it. This is because the Nasdaq has been showing the most relative weakness over the past several months. The prior low from March will probably cause the Nasdaq to bounce, but the 200-day MA will now act as the new resistance level because prior support becomes the new resistance once the support is broken. Below is a daily chart of the Nasdaq Composite:

Because each of the major indices showed signs of finding support near their prior lows of March, it is likely that we see a bounce in the broad market over the next one to two days. However, given the extremely negative breadth and bearish distribution of the past several days, I would not have high hopes of the bounce leading to any substantial gains or reversing the current downtrend. Instead, it may be wise to view the bounce as a chance to unload any long positions that are underwater (always honor your stops!) and to position yourself on the short side by selling into resistance. Short-term traders will probably find a tradeable bounce on the long side, but just don’t get too greedy. This is a much different market than several months ago and any attempt to ride gains for an extended period of time on the long side is likely to result in lost profits. In tomorrow’s newsletter, we will look at some longer-term weekly charts and discuss the intermediate-term outlook of the market. FYI, Cisco (CSCO) reports earnings after the close today, so that is likely to have an impact on the Nasdaq.

Today’s watch list:

IEF – iShares 7 – 10 year T-bond

Trigger = above 81.90
(above yesterday’s high)
Target = 83.20 (resistance of the 20-day MA)

Stop = 81.35 (below the two-day low)

Notes = The bonds have been getting destroyed lately, but are now showing signs of exhaustion and yesterday’s low held the prior day’s low. Therefore, we are looking to play a bounce on the long side and will buy TLT above yesterday’s high with a stop below the low. Note that this ETF does not move much, so we take larger position size to account for low volatility, as determined by the MTG Position Sizing Model.

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:


Open Positions:



We were flat yesterday and remain in cash.

Edited by Deron Wagner,
MTG Founder and