The Wagner Daily


The broad market spent yesterday attempting to rebound from Tuesday’s selloff, but the major indices barely gained any ground. Both the S&P 500 Index and Dow Jones Industrial Average closed 0.2% higher, but the Nasdaq Composite Index only gained 0.1% yesterday. Considering that the Nasdaq lost 2.2% the previous day, yesterday’s 0.1% gain was certainly not impressive. At its intraday peak, the Nasdaq was trading 0.7% higher, but weakness into the final hour eroded nearly all the gains. Volume in the NYSE was 4% higher than the previous day, but still came in below its 50-day average level. The Nasdaq’s volume declined by 9%. Even though the Nasdaq closed positive yesterday, breadth was negative, as declining volume marginally outpaced advancing volume.

Both the S&P 500 and Dow Jones rallied back above their 50-day moving averages during yesterday’s trading session, but both indices closed just below. Prior support of the 50-day moving averages has now become the new resistance levels. For the S&P, resistance of the 50-day MA is at 1,119. The Dow’s 50-day MA is just overhead, at 10,243, but the index closed at support of its prior downtrend line yesterday. The daily chart of the Dow below illustrates this:

As you can see, the Dow Jones was formerly in a downtrend that began with the high of February 19, and continued until the downtrend was broken on June 7. The index has been trading above this prior downtrend line for the past month, and the Dow closed right on this trendline yesterday. This is a clear example of how prior resistance (the downtrend line) is now acting as the new support. However, a break back below this trendline would be bearish, so watch the lows of the past two days carefully. The 200-day MA is at 10,176 and may provide support, but the trendline is more important in this situation.

The Nasdaq Composite Index failed to rally back above its 200-day moving average yesterday, which formerly acted as support three times during the month of June. Looking at the longer-term chart of the Nasdaq Composite, it appears we may be headed even lower, perhaps down to the 1,800 level. If you draw a trendline from the low of October 2002, and connect it with the next major low of March 2003, you will see that support of this 21-month trendline is around the 1,800 level on the Nasdaq. The weekly chart of the Nasdaq below illustrates this:

If you draw Fibonacci retracement lines from the January 2004 high, down to the last “swing low” of March 2003, you will see that the first 38.2% Fibonacci retracement level is just over the 1,800 level. Take a look:

Since many trends eventually retrace at least 38.2%, it’s likely the Nasdaq will eventually sell off down to that level. Interestingly, the 1,800 area is also where the uptrend line from the October 2002 low converges as well. So, this convergence is likely to provide very solid support around the 1,800 level, but that is well below yesterday’s close of 1,966. Of course, it could easily take many months until the Nasdaq sees the 1,800 level, but the weekly charts rarely lie, and Fibonacci convergence increases the odds of a retracement to that level.

Yahoo! reported quarterly earnings after the close yesterday and immediately triggered a broad-based selloff in the Nasdaq after-hours market. If the S&P and Nasdaq futures open near their lowest levels of the pre-market session, the major indices will open at new lows of the week. Remember that when the broad market experiences a big opening gap, it is wise to wait until the first 20 minutes have passed before making any trades. This prevents you from getting stuck on the wrong side of the market in the event the gap immediately reverses and fills. If, however, the broad market fails to recover from its gap after the first hour of trading, we are probably headed lower, especially given the break of key trendlines illustrated in yesterday’s newsletter. Be careful out there because we are just entering the earnings season this week. When a market is dull, any kind of earnings news can tend to cause exaggerated moves in both directions.

Today’s watch list:

Due to the large pre-market gap down, there are no new plays for today. However, we will send an intraday e-mail alert if/when we enter any new ETF trades. Most likely, we will be looking at new short positions IF the gap does not reverse after the first hour. For now, we remain short BBH with an unrealized gain.

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, new stop 144.20, target 139.20, unrealized points = +1.21, unrealized P/L = + $121


We remain short BBH, but lowered the stop per intraday e-mail alert yesterday.

Edited by Deron Wagner,
MTG Founder and