The Wagner Daily


The broad market began yesterday on a positive note due to excitement from the early Iraq handover, but the enthusiasm quickly faded and caused the major indices to close lower. Both the S&P 500 and Nasdaq Composite held firm to gains of approximately 0.7% for the first several hours, but sellers took control in the early afternoon and caused both the S&P 500 and Dow Jones to close with losses of 0.1%, while the Nasdaq Composite lost 0.3%. The Semiconductor Index, which began to show relative strength last week, was a drag on the Nasdaq and closed with a loss of 1.8%. But, the use of trailing stops enabled us to close the long position in SMH (Semiconductor HOLDR) near breakeven. Volume in the NYSE declined by 24%, while volume in the Nasdaq was 33% lighter than Friday. However, remember that a large percentage of the previous day’s volume was attributed to the Russell 2000 rebalancing, which occurred at Friday’s close. Volume overall came in slightly below last week’s average levels, and below the 50-day averages as well.
Declining volume outpaced advancing volume by nearly 2 to 1 in the Nasdaq, but was only slightly negative in the NYSE.

We’ve been discussing the 1,146 resistance level on the S&P 500 Index, and that same resistance level remains intact going into today. The longer the index remains below that level, the more likely the sellers will once again take control. Yesterday’s selloff caused the index to close at support of the lower channel of its uptrend, which also converges with the 20-day moving average. The chart below illustrates this convergence of the 20-day MA (in blue) and uptrend line (in red), which began with the low of May 17:

As you can see from the chart above, yesterday’s low of 1,131 is an important support level on the S&P 500. If the index closes below that level today, it will represent the break of an uptrend line that has been in place for five weeks, which could trigger a wave of selling. However, the sentiment still feels bullish overall and remember that we had several bullish “accumulation days” last week. As such, we would not necessarily be inclined to short a break of yesterday’s lows, especially ahead of the FOMC meeting.

Today begins a two-day meeting of the Federal Reserve to discuss interest rates. After thirteen interest rate cuts since January of 2001, the Feds are finally expected to raise interest rates. Most economists are expecting a rate increase of a quarter-point, but we won’t know for certain until Wednesday afternoon at 2:15 pm EST. Expect total market volume to be light for the next day and a half, as most traders and institutions will remain on the sidelines until the Fed decision is announced. Rather than speculating on which way the market will go after the rate hike is announced, it is much safer to take a “wait and see” approach before entering an abundance of new positions at this time. Furthermore, tomorrow marks the end of the second quarter. As such, the markets will likely experience additional volatility due to end-of-quarter position re-adjustment and “window dressing” by the mutual funds and other institutions. We intend to be mostly in cash during the next two days because capital preservation is always our first priority. We’re not interested in blindly “guessing” what the market’s reaction will be after tomorrow’s Fed announcement, but we will re-assess the situation and look to enter new positions on Thursday, the start of the third quarter.

Today’s watch list:

BBH – Biotech HOLDR

Trigger = below 141.60
(below the three-day low)
Target = 135.50 (retest of prior low)

Stop = 144.65 (above yesterday’s high)

Notes = The Biotech Index has been showing relative weakness over the past month and has now rallied into a vast amount of overhead supply, which creates a low-risk short entry point. If BBH breaks support of its 3-day low, we expect selling momentum to carry it down to re-test its prior lows, perhaps even lower.

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:

    SMH long (from June 23) –
    bought 36.92, sold 36.90, points = (0.02), net P/L = ($11)

Open Positions:



SMH hit our trailing stop, so we are now all cash.

Edited by Deron Wagner,
MTG Founder and