The Wagner Daily


The major indices spent the first half of yesterday continuing the downtrend that began the previous afternoon, but reversed and trended higher during the latter half of the day. At its worst level of the morning, the S&P 500 Index was off 0.5%, but the afternoon rally enabled the index to close with a gain of 0.4%. The Dow Jones Industrial Average traded in a similar intraday fashion, but lagged behind the S&P and only closed 0.2% higher. Conversely, the Nasdaq Composite Index broke its recent pattern of showing relative weakness and was the clear leader of the broad-based indices yesterday. After probing below support of both its 50 and 200-day moving averages in the morning, buyers stepped up to the plate and pushed the Nasdaq to a closing gain of 1.0%. The Semiconductor Index ($SOX), which has been underperforming nearly every other sector over the past month, showed impressive strength and closed with a solid 3.5% gain yesterday. As we always say, the $SOX index usually leads the Nasdaq, and yesterday was a clear example of this.

Yesterday’s volume patterns were quite interesting. When the broad market was selling off in the morning, volume was running approximately 15% higher than the previous day, which meant we were on pace for a bearish “distribution day.” However, volume increased even more when the market reversed and rallied in the afternoon. At day’s end, volume in the NYSE had increased by 23%, while turnover in the Nasdaq increased by 20% over the previous day. This means that yesterday was a bullish “accumulation day” because the major indices closed higher AND on higher volume than the previous day. Volume in both indices came in just below the 50-day average levels yesterday, but this was promising because it has been nearly a month since we have seen volume exceed the 50-day averages. Yesterday’s volume in the NYSE and Nasdaq was also on par with last Friday’s volume, but remember that Friday’s turnover was inflated due to “quadruple witching” options expiration day. It was the first day since May 25 that the Nasdaq rallied on significantly higher volume, which means that the Nasdaq may be beginning to show signs of institutional interest. A return of institutional participation is necessary in order to break out of the choppy trading range that has plagued the indices over the past few weeks.

Yesterday morning’s weakness caused both the S&P 500 and the Dow Jones to drop below support of the past week’s trading ranges. Because of this, it initially appeared as if we may have a tradeable trend (to the downside) over the next several days. But, the rally in the afternoon caused both indices to close right back in the middle of their ranges. Similarly, the Nasdaq Composite appeared to be in big trouble when it dropped below convergence of its 50 and 200-day moving averages yesterday morning, but also reversed and closed at the upper end of its recent trading range. While yesterday’s action was bullish overall, the bad news is that the major indices remain in the same choppy, sideways range. This makes it quite difficult to swing trade the broad-based ETFs like SPY (S&P 500), so you will probably have better success focusing on trading the sector-specific ETFs such as BBH (biotech), SMH (semiconductor), etc. The hourly chart of the S&P 500 Index below illustrates the indecision and lack of a trend over the past week:

One index you may want to focus on is the Semiconductor Index ($SOX). As you probably know, the SOX has been lagging the market for many months, but its longer-term weekly chart may be forming the first “higher low” since the downtrend began in January 2004. The weekly chart of the SOX below illustrates this:

As you can see, the 450 level marks the first “higher low” on the index, but there is strong overhead resistance of the 200-week MA, which is at 490. Coincidentally, the 490 level also marks the resistance of the prior high. A rally above the 490 level would cause the beginning of an uptrend in the SOX, as it would represent the first significant “higher low” and “higher high” of 2004. Rather than buying the breakout above the 490 level, we feel you have a better risk/reward ratio to buy the Semiconductors here, now that a “higher low” has been formed. You could use a break below the 450 level to guide you with stop placement. SMH is the primary ETF that tracks the $SOX index, but you may also want to take a look at BRCM, which is an individual semiconductor stock that broke above its pivot on high volume yesterday. It also is breaking out of a bullish cup and handle pattern. Note: Morpheus fund DOES have a position in BRCM, which we bought yesterday.

Today’s watch list:

SMH – Semiconductor HOLDR

Trigger = above 36.91
(above yesterday’s high)
Target = 39.05 (test of prior high)

Stop = 35.65 (below yesterday’s low)

Notes = SMH rallied above the upper channel of its first downtrend line yesterday. Combined with a “higher low” in the SOX weekly chart, we feel this ETF is good risk/reward to buy, as long as stop is below yesterday’s low.

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:

    BBH short (half position, from June 21) –
    shorted 139.86, covered 136.98, points = + 2.88, net P/L = + $143

    QQQ short (from June 21) –
    shorted 36.33, covered 36.37 (avg.), points = (0.04), net P/L = ($20)

    DIA short (from June 22) –
    shorted 103.54, covered 104.20, points = (0.66), net P/L = ($135)

Open Positions:

    BBH short (half position, from June 21) –
    shorted 139.86, stop 139.90, target 133.40, unrealized points = + 1.11, unrealized P/L = + $56


We covered half of QQQ in morning weakness for profit, but stop hit on remaining position in afternoon. We are now flat QQQ. We also covered half of BBH into weakness for + 2.8 point gain, and are still short second half of position with same stop. Per intraday e-mail alert, we shorted DIA yesterday morning, but the afternoon reversal stopped us out the same day.

Edited by Deron Wagner,
MTG Founder and