Commentary:

Like the previous day, the major indices once again traded in an indecisive manner and closed with mixed results. The S&P 500 Index began the day with an opening gap up to the high of last week, but drifted lower for the remainder of the morning. Buyers stepped in during the final ninety minutes of trading and pushed the index to a new intraday high, reversing the morning weakness. However, relative weakness in the Nasdaq, which was unable to rally above its opening high, prevented the S&P from rallying very far. The S&P 500 Index closed with a 0.3% gain, but the Nasdaq Composite Index closed 0.1% lower. The blue-chip Dow Jones Industrial Average led the pack yesterday and closed 0.6% higher. The index also closed above its 50-day moving average for the first time since April 27.

Total market volume in the NYSE was basically unchanged, and increased by 4% in the Nasdaq yesterday. Because the Nasdaq Composite Index closed with a loss AND on higher volume, yesterday was technically a bearish “distribution day” in the index. However, the loss in the Nasdaq was only fractional and the volume increase was minor, so it did not have the feel of heavy institutional selling. Despite yesterday’s 0.1% loss, advancing volume actually outpaced declining volume in the Nasdaq by a small margin. The bigger issue is that overall volume in the markets has really dried up over the past several weeks. Monday’s volume in both the NYSE and Nasdaq was the lightest single day of the year, and the Nasdaq volume has not had one day above its 50-day average level in nearly a month.

The recent drop in total market volume indicates that institutions are largely remaining on the sidelines and are in a “wait and see” mode. This, of course, makes it more challenging to profit from short-term trading because markets tend to become choppy when volume declines. The action of the past two days is a clear example of this. Furthermore, trends that do occur on light volume days can reverse easily, which is why we have been so cautious about aggressively entering new positions lately.

In yesterday’s Wagner Daily, we spoke about the likelihood of the 1123 – 1124 area acting as a key resistance level going into yesterday’s session, and that is exactly what happened. Below is a chart that illustrates how the S&P 500 Index futures gapped up exactly to this pivotal point, sold off after failing to break resistance, rallied through the resistance in the afternoon, then found support at the 1124 breakout level during the final hour. The afternoon breakout, then subsequent drop to the breakout level, is a clear example of the most basic tenet of technical analysis — a former resistance level will become the new support level once that resistance level is broken. Take a look:

Obviously, the 1123 – 1124 area is a key support/resistance level to watch going into today. If the S&P 500 holds above it, we will probably see a rally due to the break of the primary daily downtrend line, but this has not been confirmed yet.

One of the biggest factors holding down the market right now is weakness in the Semiconductor Index ($SOX), which reversed yesterday after running into resistance of its primary downtrend line on the daily chart. Take a look:

With the Dow’s crossing above the 50-day MA yesterday, each of the three major indices we follow are now back above their 20, 50, and 200-day moving averages. Overall, this is bullish because we generally trade in the direction of the moving averages. However, the heavily-weighted $SOX index continues to lag behind. The $SOX closed above its 200-day moving average for only two days this week, but dropped more than 2% yesterday and closed back below it. It’s very rare for the Nasdaq to sustain a rally without the $SOX leading the way, so keep a close eye on that index when trading because it often acts as a leading indicator.

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Today’s watch list:

There are no new plays for today, but we are now short HHH (Internet HOLDR), which we entered yesterday before the close. Intraday e-mail alert was sent to Wagner Daily subscribers.

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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 (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:

HHH short (from June 2) –
shorted 60.15, stop 61.15, target 57.85, unrealized points = + 0.10, unrealized P/L = + $20

Notes:

Per intraday e-mail alert, we shorted HHH before the close yesterday, due to relative weakness in the Internet sector. We will trail a stop lower to lock in profits as we are able.

Edited by Deron Wagner,
MTG Founder and
President