The Wagner Daily


Well, so much for follow-through on Tuesday’s bounce in the Nasdaq! The broad market began the day with an opening gap up above the previous day’s highs, but institutions immediately began selling into the strength. This was apparent because volume in the Nasdaq was approximately 37% higher than the previous day after the first two hours of trading, but the Nasdaq was trading in the red. We discussed this in the MTG Intraday Real-Time Room yesterday morning by pointing out that volume was coming in much higher than the previous day, but the indices were each trending lower ever since the opening gap. We anticipated a bearish overtone for the rest of the day, and that is exactly what occurred.

To the delight of bears, yesterday was one of the smoothest trending days we have seen in a long time, as each of the major indices opened at their intraday highs, trended steadily lower, then closed at their lows of the day. The Nasdaq dropped 2.2% yesterday on volume that was 23% higher than the previous day. The S&P 500 lost 1.4% and the Dow Jones Industrials shed 1.0%. Volume in the NYSE was 17% higher than the previous day and was the highest day since May 12. This, of course, is quite bearish considering the S&P closed 1.4% lower, but on strong volume. Although the Semis got whacked yesterday, we sold our SMH long position into the opening gap because it hit our original profit target. Any way you look at it, it was a clear day of broad-based distribution, simply one of many over the past month. If you’ve been paying close attention to our volume analysis over the past few weeks, yesterday’s weakness should not have come as a big surprise. Even though the Nasdaq rallied 1.7% the previous day, remember that it occurred on much lighter volume than the numerous distribution days of the past month.

Did any of you re-short HHH into the bounce yesterday? We netted a 3-point gain by shorting HHH earlier in the week, but it appears an even bigger move to the downside is on its way. Like the major indices, HHH gapped up above the previous day’s high yesterday morning, but closed below the previous day’s low. This resulted in nearly a 2-point drop intraday. Quarterly earnings from EBAY, which was trading several points lower after yesterday’s close, will probably cause HHH to gap down and drop several more points in today’s session.

We initially mentioned the idea of shorting HHH in the July 14 issue of The Wagner Daily, after the Amex Internet Index ($GIN) broke support of its primary uptrend line. Since then, HHH has dropped nearly 7% and now appears headed down to its weekly trendline support, which is about four more points below yesterday’s closing price. The weekly chart of HHH below illustrates the first break of support (red line) when we originally shorted HHH. The blue line is the primary uptrend line from the October 2002 low, which is where we anticipate HHH will drop to, quite possibly within the next few days:

Similarly, the Biotech Index broke key support yesterday and is now poised to sell off down to its primary weekly uptrend line, just like HHH. When formerly market-leading sectors such as Internets and Biotechs begin selling off, it usually drags the whole market down with it. Clearly, that has been the situation as of late. Here’s the weekly snapshot of BBH (Biotech ETF):

Hopefully you heeded our warning to use Tuesday’s bounce in the markets as chance to unload long positions and/or enter new short positions. If you did, you’re probably quite pleased and a few dollars richer. If, however, you are sitting with losing long positions that are against you by more than 7 to 8%, don’t fall into “hope” mode because stocks can and will go much lower than you ever could imagine, just as they do the same thing on the upside in a bull market. Capital preservation needs to be your number one focus right now, so don’t let your ego get in the way!

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:

    SMH long (from July 20) –
    bought 32.56, sold 33.49, points = + 0.93, net P/L = + $270
    Open Positions:


    Per yesterday’s newsletter, we sold SMH into the opening gap and locked in a nice profit. We are now cash.

    Edited by Deron Wagner,
    MTG Founder and