The Wagner Daily


The Nasdaq Composite Index followed through and rallied off the previous day’s afternoon reversal, but both the S&P 500 Index and Dow Jones Industrial Average languished. The Nasdaq opened above the previous day’s high, traded sideways in a narrow range, and closed 1.2% higher. The S&P 500, however, only gained 0.5%, while the Dow tacked on only 0.1%. Volume in the NYSE was about the same as the previous day, which means we have now seen three consecutive days of gains on above average volume. However, volume in the Nasdaq declined by 8%. A surge in volume, combined with the Nasdaq’s solid gain, would have left the unmistakable footprint of institutional interest. But, unfortunately, the volume was nothing exciting.

Strength in the Semiconductor Index, something we have not seen in quite a while, was responsible for leading the Nasdaq to a solid gain. Of importance is that the SOX Index also closed firmly above resistance of its primary downtrend line that was formerly intact for a full month. As such, we bought SMH (Semiconductor ETF) because we feel the index could stage a multi-day rally now that the downtrend has been broken. Take a look:

Unlike the SOX Index, each of the major indices closed at or below resistance of their primary downtrend lines, which we have been warning about for the past several days. If the indices head back down from current levels, the rally of the past week will have been nothing more than a technical bounce within the context of a still-intact downtrend. However, the possibility equally exists that the major indices will push through resistance of their downtrend lines which, at the very least, would result in a cessation from the heavy selling that plagued most of July. Below is a daily chart of the Nasdaq Composite, which illustrates how the index closed right at resistance of its primary downtrend line, which began with the high of June 30:

Similarly, the S&P 500 Index has also rallied into resistance of its respective downtrend line. Amazingly, the S&P stopped dead in its tracks when it ran into resistance of its downtrend line yesterday. Note how yesterday’s high perfectly converged with resistance of the downtrend line, which caused the index to close slightly off its intraday highs. The power of trendlines is clear in the chart below:

The Dow Jones Industrial Average probed above its downtrend line on an intraday basis, but closed right below it:

Needless to say, the next several days will be critical in determining the direction of the broad market in the intermediate-term. If the S&P and Nasdaq both fail to rally above their respective downtrend lines, the current bounce would be best viewed as a low-risk opportunity to enter new short positions. However, a confirmed, high-volume break above the downtrend lines will likely spur short covering that could quickly drive the market significantly higher. In other words, if you are still heavily short, have a solid plan that enables you to quickly close your short positions if the indices break out of the current downtrend. As for entering new long positions, we continue to feel the best risk/reward ratio can be found through buying the tech-related sectors and stocks, specifically the Semiconductor ($SOX) Index. Because the $SOX broke above its primary downtrend line, we maintain our long position in SMH.

Today’s watch list:

There are no new plays for today, although we are now long SMH.

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:

    SMH long (from July 29) –
    bought 31.89, new stop 31.40, target 33.55 unrealized points = + 0.57, unrealized P/L = + $172


SMH triggered yesterday, so we are now long. Note the new stop above.

Edited by Deron Wagner,
MTG Founder and