The Wagner Daily


A less-than-stellar earnings report from Yahoo! after Wednesday’s close caused the major indices, especially the Nasdaq, to begin yesterday with a sharp opening gap down. The Nasdaq attempted to shrug off Yahoo’s weakness in the late morning and actually rallied back to break-even on the day, but an abundance of overhead supply caused the index to settle into a steady downtrend throughout the afternoon. Each of the major indices closed at their intraday lows, indicating institutional selling into the close. The S&P 500 Index and Dow Jones Industrials closed 0.8% and 0.7% lower respectively, but the Nasdaq once again showed major relative weakness and shed 1.6% yesterday. Volume increased by 5% in the NYSE, but only 1% in the Nasdaq. This means that yesterday was another bearish “distribution day” in the broad market. Yesterday’s action caused the Nasdaq to break horizontal price support of 1,960 and close at a 7-week low, but the Dow closed right on support of its 200-day moving average.

On June 23, the Nasdaq Composite rallied and closed above a downtrend line that had been in place for six months. During the next five days, the index traded above the breakout of that downtrend line and even set a “higher high” on the daily chart. A few “accumulation days” during that period also confirmed the strength of the breakout, and the Nasdaq was poised to consolidate and head higher. But the bullish picture quickly changed when we entered the month of July, and hence the third quarter of the year. Since beginning the month, the Nasdaq has closed lower four out of five days. Of the four days the index closed lower, three of those days were on higher volume than the previous day, which means the Nasdaq has already seen three bearish “distribution days” within the first five days of July! This obviously indicates institutional selling and is not a picture of a healthy market.

Although the S&P 500 Index and Dow Jones Industrial Average have also been exhibiting weakness during the past several weeks, the Nasdaq has been much weaker. Since beginning the month of July, the S&P has lost 2.7%, but the Nasdaq Composite has dropped 5.4%, exactly double the loss of the S&P 500. Because of the volatile nature of most tech and biotech stocks, the Nasdaq usually swings more than the S&P in both directions, but a loss of exactly double the S&P is a bit unusual. The weakness in the Nasdaq could easily be blamed on the interest rate increase, analyst downgrades, or corporate earnings warnings, but a quick look at a weekly chart of the index will show you why the Nasdaq has been under pressure since the beginning of the month:

The chart above illustrates the Nasdaq Composite’s uptrend line that was formerly in place from March of 2003 through April 2004. After closing below support of the year-long uptrend line on the week of April 30, 2004, the Nasdaq began to rally during the third week of May. The index stayed in “rally mode” for six weeks, until it reversed at the beginning of July. As you can see, the reversal was simply caused by resistance of the prior uptrend line. Notice how the Nasdaq was simply unable to rally back above that former trendline support. This is a great example of how prior support becomes the new resistance level after the support is broken.

The financial media will always give you 101 reasons why the Nasdaq is showing weakness, but a basic understanding of technical analysis will usually show the real reason. Armed with this knowledge, you can increase your odds of profitability by understanding the “big picture” of where the market is headed. But, technical analysis is only useful if you follow a strict set of disciplined trading rules. When the market reverses a trend, it’s crucial that you quickly cut the losses on any losing positions and re-assess the situation. Don’t fall into “hope mode” because the market will do whatever it wants to do, regardless of how much you hope or pray. The road to trading success is littered with the bodies of those who say things like “I can’t sell now, it’s too much of a loss,” or “I think (hope) it will rally back to my breakeven point, and then I will never do that again!” Conversely, those who eventually succeed and become consistently profitable traders all have one trait in common; discipline to cut the losers quickly and forget about their egos. Which type of trader do you want to be?

Today’s watch list:

PPH – Pharmaceutical HOLDR

Trigger = above 77.15 (above July 7 high)
Target = 78.70 (50% retracement of last major move down)
Stop = 76.45 (below yesterday’s close)

Notes = The Pharmaceutical Index began showing strength yesterday morning, but fell weak into the close. We believe we are seeing the beginning of sector rotation back into this index and will buy on strength today, above 77.15 area on PPH. Since PPH sometimes has a wide spread, remember you can track the price of PPH by following its index instead, which is $IPH.X.

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 July 6) –
    shorted 143.81, covered 141.28, points = +2.53, net P/L = + $127

Open Positions:

    BBH short (HALF position, from July 6) –
    shorted 143.81, new stop is 10 cents above the high of first 20 minutes, target 139.20, unrealized points = +4.21, unrealized P/L = + $211


Per intraday e-mail alert, we covered HALF of the BBH short position yesterday morning, netting a gain of 2.5 points. However, we remain short the second half of the BBH position with an unrealized gain of 4 points. Since BBH is nearing our profit target of 139.20, we have lowered the stop to 10 cents above the high of the first 20 minutes of today’s trading. If BBH fails to set a new high after the first 20 minutes, we will stay short.

Edited by Deron Wagner,
MTG Founder and