The Wagner Daily


For the first time in five weeks, volume in the Nasdaq spiked above its 50-day average level, as the index closed with a gain of more than 1% for the second consecutive day. Yesterday’s volume of 1.85 billion shares in the Nasdaq was 8% higher than the previous day, and the highest since May 19. Breadth was also quite positive, as advancing volume outpaced declining volume by a margin of 5 to 1! This decent surge in volume and positive breadth enabled the Nasdaq Composite to follow up Tuesday’s 1.0% gain with a 1.3% gain yesterday. Volume in the NYSE increased 5% over the previous day, which enabled both the S&P 500 and Dow Jones Industrial Average to turn in moderate gains as well. The S&P 500 Index closed 0.9% higher, while the Dow Jones Industrial Average closed 0.8% higher. As anticipated, the Semiconductor Index, and other tech-related sectors such as Networkers, Telecom, and Internets, led the Nasdaq yesterday. Strength in the Semis enabled us to profit from SMH (Semiconductor HOLDR), which we bought yesterday morning. We scratched on the remaining half position of BBH (Biotech ETF) short.

The best thing about yesterday’s broad-based strength is that it pushed the major indices out of the trading ranges they have been stuck in for the past few weeks. As we mentioned before, choppy and range-bound trading sessions are often the result of light volume markets and lack of institutional participation. However, when total market volume suddenly increases, which indicates institutional participation, it usually causes a market to make a sharp move in one direction or the other. If the market moves higher when volume increases, it is called an “accumulation day” (which the past two days have been). If the market moves lower, but on higher volume, it is called a “distribution day.” We pay so much attention to volume on a daily basis because it is one of the most reliable technical indicators that never lies! Recall that Tuesday was the first solid “accumulation day” in the Nasdaq in more than three weeks. To astute traders, this served as an early warning that the market was likely to show strength the following day, which it did yesterday.

The most significant technical event that occurred yesterday was the Nasdaq Composite’s break above its primary downtrend line, which had been in place since the high of January 2004. Not only did the index close above the psychological resistance price of 2,000, but it also closed firmly above a downtrend that had been intact for 6 months! This is not to be ignored because it indicates a major change in sentiment, which seems to have suddenly become bullish. The daily chart of the Nasdaq Composite below illustrates yesterday’s break of the downtrend line:

The Nasdaq has broken above the upper channel of the daily downtrend line, but it needs to set a “higher high” in order to confirm a major trend reversal. A “higher high” would occur if the Nasdaq closes above the prior high of 2,023, which was set on June 8. This is only 3 points above yesterday’s closing price, so watch that level closely.

The S&P 500 Index, which has been above its primary downtrend line since June 7, has resistance of its prior high at the 1,146 area. This is a key resistance level to watch going into today:

The broad market has turned in impressive gains during the past two days, and higher volume has confirmed the moves. However, given the significant gains, we would not be surprised to see the market take a rest today and correct by time. Regardless of whether the broad market rallies another day or simply takes a rest, we would not be heavily short right now. Quite to the contrary, there are many bullish setups in individual sectors and stocks. Whether it makes sense or not, sentiment has definitely changed over the past two days and the best traders will observe that and simply react to what the market is telling them.

Today’s watch list:

There are no new plays for today, although we remain long SMH.

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 139.89, points = (0.03), net P/L = ($4)

Open Positions:

    SMH long (from June 23) –
    bought 36.92, new stop 36.50, target 39.05, unrealized points = + 0.68, unrealized P/L = + $204


We bought SMH per yesterday’s newsletter and remain long the full position. We also closed the remaining BBH short position for a scratch.

Edited by Deron Wagner,
MTG Founder and