The Wagner Daily


Sparked by a brokerage downgrade in the Semiconductor Index, the Nasdaq Composite Index sold off sharply yesterday, but non-tech related shares held up much better. A 4% decline in the Semiconductor (SOX) index yesterday led the Nasdaq to a loss of 2.2%. More importantly, volume in the Nasdaq surged 62% higher than the previous day. Due to the 3-day weekend, last Friday’s session was the second lightest volume day of the year in the Nasdaq, but the 62% increase still caused yesterday’s volume to register well above its 50-day average level. Within the past ten weeks, there has only been one day where the Nasdaq’s volume came in higher than yesterday. This occurred on June 25, a bullish “accumulation day” in which the Nasdaq closed sharply higher and on higher volume than the previous day. Conversely, yesterday was a bearish “distribution day” because the index closed significantly lower and on higher volume than the previous day.

The Dow Jones Industrial Average, which lost 0.6%, showed the most relative strength of the major indices yesterday. The S&P 500 Index also held up much better than the Nasdaq and closed with a loss of “only” 0.8%. Volume in the NYSE was 18% higher than the previous pre-holiday session, but still came in BELOW its 50-day average level. Since both the Dow and S&P closed with losses AND on higher volume, we could technically say that the NYSE also experienced a “distribution day,” but the big difference is that NYSE volume came in below its average level, while volume in the Nasdaq surged well above its average level. As such, there was clearly more institutional distribution in the Nasdaq than the S&P and Dow, and the percentage differences in losses confirms this as well.

“Distribution days” indicate institutional selling, and it was clear that funds and other institutions were dumping stocks in most of the tech-related sectors yesterday. We pay such close attention to price and volume patterns in the markets each day because it shows us not what “mom and pop” are doing, but what the institutions are doing. This is crucial because institutional interest makes up the majority of the market’s volume each day. As such, institutions alone have the power to move the markets. While they can play all kinds of games to hide their true intentions, one thing institutions can never hide is whether they are heavily buying or selling on any given day. This is always quite transparent, based on whether the market experiences gains or losses and on higher volume. If an index closes higher AND on higher volume than the previous day, it is an “accumulation day.” If, however, the index closes lower AND on higher volume, this is called a “distribution day.” Intermediate-term rallies, such as the one the Nasdaq was participating in during the past several weeks, are usually not sustainable if an index begins to see more than two or three “distribution days” within the course of two to three weeks.

In yesterday’s Wagner Daily, we looked at weekly charts of the major indices and noted the key support and resistance levels for each one. Let’s take a quick look at how yesterday’s selloff affected these levels and which indices are still above their primary support levels. We’ll begin by taking a look at a daily chart of the Nasdaq Composite, the hardest-hit of the major indices:

Looking at the chart above, the most notable event that occurred yesterday was the Nasdaq’s break below the 200-day moving average (the purple line). Since rallying above it on May 25, the Nasdaq had previously tested support of its 200-day moving average on three separate occasions throughout June, but bounced off it each time. However, the 200-day MA failed to act as support yesterday, and the index closed firmly below. Furthermore, the Nasdaq broke below support of its prior, six-month downtrend line (in red), which it was trading above since June 23. Since prior support becomes the new resistance once the support is broken, expect the Nasdaq to find overhead supply and resistance on any rally attempt today. The 1,980 to 2,000 level will provide the most resistance due to the prior downtrend line and 200-day MA. Despite the overhead resistance, the good news is the Nasdaq has pretty solid support at the 1,963 level, which is horizontal price support from the previous lows in June. The blue line illustrates this support level.

Interestingly, the Nasdaq 100 Index, which is less diverse than the Nasdaq Composite Index, closed just above support of its 200-day MA. Below is a daily chart of QQQ, which is the ETF that mirrors the Nasdaq 100 Index:

The S&P 500 Index closed below support of its 50-day MA, which is at the 1,119 area. However, it closed right on trendline support from the prior downtrend line. If this level holds, it could serve to push the index higher from here because it represents a low-risk entry point on the long side. The weekly chart of the S&P 500 below illustrates how the index closed on support of its prior downtrend line:

Quarterly earnings reports from Yahoo! (YHOO) and Genentech (DNA) after the close today will kick off the earnings season. As such, we recommend you make it a habit to check when the earnings dates of the companies you are trading. Otherwise, you may get caught blindsided by holding a position overnight that you probably would not have held otherwise. There are many sources to view earnings dates, but our favorite place is the Yahoo! Finance web site, which is free.

On a separate note, check out the nine new Morningstar-related ETFs that iShares has just launched by clicking here.

Today’s watch list:

(There are no new plays for today.)

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:

    BBH short (from July 6) –
    shorted 143.81, stop 145.40, target 139.20, unrealized points = + 0.56, unrealized P/L = + $56


We shorted BBH yesterday when it traded through our trigger price. The QQQ long entry never triggered because it failed to rally above its high of the first 20 minutes.

Edited by Deron Wagner,
MTG Founder and