The Wagner Daily


The broad market traded in a narrow range last Friday, but the major indices each closed marginally higher and near their respective highs of the week. Last week began with each of the major indices setting new multi-month lows on July 26, but a decent rally the following day sparked a positive change in sentiment that remained throughout the rest of the week. Friday’s 0.3% gain in the Nasdaq Composite enabled the index to break its 4-week losing streak and gain 2.1% for the week. Both the S&P 500 and Dow Jones Industrials closed 0.1% higher on Friday, which enabled the S&P 500 Index to snap its 6-week losing streak and gain 1.4% for the week. Volume declined in both the NYSE and Nasdaq, but it was not a big deal considering that Friday was essentially a consolidation day that occurred on the heels of the previous day’s gains.

As you know, we have been closely following the daily charts of the S&P 500, Dow Jones Industrials, and Nasdaq Composite because each of those indices were approaching resistance of their primary downtrend lines throughout last week. Because the respective downtrend lines have been intact since the highs of June 30, the broad market’s ability or inability to rally firmly above the downtrend lines is key in determining the market’s direction going into August.

When we last analyzed charts of the three major indices in Friday’s newsletter, we noted that none of the major indices had closed above their respective downtrend line, although each had traded above their downtrend lines on an intraday basis during Thursday’s session. Therefore, we mentioned that the next several days would put the major indices in a “make or break” situation that would determine whether the month-long primary downtrend resumed, or whether the downtrend lines would be broken. Unfortunately, Friday’s narrow-range session did little to indicate which scenario would play out for the S&P 500 Index, which closed at resistance of its downtrend line for the second consecutive day. However, the Nasdaq Composite Index showed relative strength to the S&P 500 and actually did close above its downtrend line. Notice how the Nasdaq closed above its downtrend line, but the S&P has (so far) failed to do the same:

While it’s bullish that the Nasdaq closed last week above its downtrend line, we can not yet confirm a clear break of the downtrend line based on only one day of price action. When stocks are attempting to reverse a trend, they often probe above or below their trendlines for a day or two, fool everyone, then resume the prior direction of their trends. Therefore, we would need to see several more days of the Nasdaq holding above its downtrend line before we can declare the primary downtrend has been broken. More importantly, we need to see an increase in volume, which has been absent during most of the “up” days in the market, but in full force on the “down” days. Last Tuesday’s Nasdaq rally that occurred on higher volume than the previous day was the only “accumulation day” the index had seen in over a month. Since then, the Nasdaq closed higher both on Thursday and Friday, but both days were on declining volume. The positive, however, is that the Semiconductor Index continued to show strength last Friday, after breaking above its primary downtrend line the previous day. The Nasdaq often follows the $SOX. . .

Remember that volume is the fuel that drives the market in both directions. Without an increase in volume, rallies are typically short-lived, so we’ll continue to watch not only for a break of the downtrend lines, but for the confirmation that would come with an increase in turnover. Until the volume confirmation occurs, be careful on the long side of the market and be prepared to close any long positions on short notice. While there may be a light at the end of the tunnel, it may be a train!

Today’s watch list:

HHH – Internet HOLDR ETF

Trigger = below 53.90 (below the low of the past two days)
Target = 51.20 (just below prior low from July)
Stop = 55.20 (just above last week’s high)

Notes = We netted a big gain from our last swing short in HHH, which we covered when it bounced off support of its 200-day moving average. However, the index has now rallied into resistance and appears to be headed back down in a resumption of its prior downtrend. A break below the low of the past two days is our trigger for short entry. Because the spread can sometimes be wide on HHH, remember to follow the tracking stock’s index instead, which is $HHI.X. It will show you the real “fair value” of the HHH ETF.

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 (HALF position, from July 29) –
    bought 31.89, sold 32.95, points = + 1.06, net P/L = + $151

Open Positions:

    SMH long (HALF position, from July 29) –
    bought 31.89, new stop 32.10, target 33.55 unrealized points = + 1.01, unrealized P/L = + $150


We sold half of our SMH position into strength on Friday in order to lock in gains on partial share size. We remain long the remaining half position with a tighter stop.

Edited by Deron Wagner,
MTG Founder and