The Wagner Daily


The major indices closed higher across the board on Friday, but the bounced was feeble and volume was not impressive. The S&P 500 Index closed with a gain of 0.3%, the Dow Jones closed 0.4% higher, and the Nasdaq Composite bounced 0.6%. But, despite Friday’s gain, the Nasdaq Composite still closed 3.0% lower for the week. The Dow Jones Industrial Average held up much better and closed only 0.7% lower. The S&P 500 Index lost 1.2% for the week. Friday’s volume in the Nasdaq was 22% lighter than the previous day, while the NYSE volume declined 15%. Obviously, it was not the type of volume you want to see on an “up” day in the markets because gains can easily come undone when they occur on light volume. The positive thing about Friday’s session was that the Biotech Index continued to follow-through on its recent weakness. This enabled us to close the remaining shares of our BBH short position for a net profit of more than 5 points.

Since the beginning of the month, the Nasdaq has sustained losses on four of six days, three of those on increased volume. Both of the “up” days also occurred on lighter volume than the previous day. Higher volume on the “down” days and lighter volume on the “up” days is exactly the opposite type of price-volume relationship you would see in a healthy market. Within the course of one week, the Nasdaq gave back all of its gains from the rally that began on May 25 and peaked on June 30. The losses of July 6 officially ended the Nasdaq’s uptrend that began with the low of May 17, and also caused the index to drop back below its 200-day moving average. The daily chart of the Nasdaq below illustrates how the uptrend and 200-day MA was broken on July 6:

As you can see from the chart above, the recent Nasdaq rally is officially dead. Going into this week, look for last week’s low of 1,934 to act as support on the Nasdaq Composite. If that support level is broken, the next major support is all the way down at the May lows, around the 1,865 – 1,880 range. Resistance will first be found at the 1,960 area, which acted as support on several occasions in June, but has now become the new resistance level. Beyond 1,960, the 200-day MA will act as resistance at the 1,980 level.

The S&P 500 Index sustained losses last week, but its daily chart looks much better. Unlike the Nasdaq, the S&P is still above support of its prior downtrend line from the high of 2004, which was set in March. However, the S&P 500 is at a pivotal point as we enter the new week because the index closed right on support of its prior downtrend line. A break below last week’s low of 1,108 would result in a cross back below this area of support, which would result in a selloff down to support of the 200-day MA (purple line), which is at the 1,101 area. Notice also how the 200-day MA acted as support that sparked the rally in mid-May:

As you may have noticed, we have not been discussing the support or resistance levels of the 20 and 50-day moving averages lately. This is because moving averages work much better when in a trending market. When the markets are choppy and range-bound, as they have been since March, shorter-term moving averages tend to cross back and forth over each other. When this occurs, moving averages are not very useful at predicting support and resistance levels. As an example, check out the daily chart of the S&P Mid-Cap Index below:

Although the 20 and 50-day moving averages have not been useful during the past four months, notice that the 200-day MA (purple line) has trended much smoother and actually worked very well at providing key support in mid-May. In choppy and range-bound markets, the longer moving average periods (such as the 200-day) serve more purpose as support or resistance than do those of a shorter time period (such as the 20 and 50-day).

Earnings season began last week, but it kicks into full gear in the coming week. Notable companies reporting earnings this week are: Johnson and Johnson, Merrill Lynch, Intel, and Juniper (all on Tuesday), Q-Logic, Apple, Sandisk (Wednesday), and Nokia, IBM (Thursday). The volatile broad-market reaction to Yahoo’s report last week was a clear example of how skittish the market can be around earnings season, especially when stuck in a low-volume, range-bound period. So, be careful out there in the coming week and consider avoiding large share size on both sides of the market, at least until earnings season has passed. Odds are good you won’t miss much, even if you took a few days away from trading.

Today’s watch list:

PPH – Pharmaceutical HOLDR

Trigger = above 77.15 (above the July 8 high)
Target = 78.70 (50% retracement of last major move down)
Stop = 76.40 (below the July 8 close)

Notes = We were stalking PPH for a potential long entry last Friday, but it never hit our trigger price. We still feel the index is putting in a short-term bottom, so we are once again looking for an entry above the 77.15 level. 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 138.77, points = +5.04, net P/L = + $252

Open Positions:



BBH short hit and surpassed our profit target of 139.20 on Friday, so we tightened the stop and eventually covered with a 5-point gain. We are now flat.

Edited by Deron Wagner,
MTG Founder and