The Wagner Daily


Just as the the quarterly earnings report from Cisco (CSCO) sparked a broad-based selloff the previous day, a negative earnings report and lowered profit guidance from Hewlett-Packard (HPQ) prompted a similar reaction yesterday. However, the previous day gapped down on the open, but then trended moderately higher throughout the day. Conversely, the broad market gapped down yesterday, but continued trending lower until the market closed. This caused both the S&P and Dow to close with losses of 1.2%, and just below their respective lows of the previous day. The Nasdaq Composite followed a similar intraday pattern, but closed with a 1.7% loss, and also at a new low of the week.

Unlike Wednesday’s broad-based selloff, yesterday’s losses occurred on lighter volume, as volume in the Nasdaq declined by 9% and volume in the NYSE was about the same. While this may not be much consolation to the bulls who took more losses yesterday, it is indeed a key signal that the sellers may be drying up, at least in the short-term. Confirmation of this thought would occur if the broad market closes higher today, especially if it does so on higher volume.

For the past five days, both the S&P 500 and Dow Jones Industrial Average have been stuck in a trading range. On the S&P 500 Index, resistance has been at the 1079 level, while support has been at 1062. The 1079 level, which we have been discussing extensively, represents resistance that was created from the prior low of July, while the support of 1062 was set with the low of last Friday, August 6. The horizontal lines on the chart below illustrate this trading range between the 1062 to 1079 level:

Similarly, the Dow Jones Industrial Average has been trading in a similar range between the 9800 area as support, and the 9958 area as resistance. The horizontal lines below illustrate this trading range:

As you probably know, it is wise to reduce both the number of positions and your average position size when the broad market is stuck in a sideways range. Because the primary trend has been “down” since the highs of June 30, one would assume that the next move out of the trading range will be lower. However, it is wise to wait for an actual break below the two areas of support illustrated above, rather than trying to predict the direction of the market’s next major move. As for trading while the S&P and Dow are stuck in the ranges illustrated above, iit can be done, but is best if you are only daytrading and taking profits quickly. For swingtrading the broad-based ETFs such as SPY or DIA, it makes more sense to wait for a break out of the range of the past five days.

Unlike the S&P and Dow, which have both been trading in a range for the past five days, the Nasdaq nearly closed at a new one-year low, as August 26 of 2003 was the last time the index traded at yesterday’s closing price of 1752. It seems pretty likely that the Nasdaq will soon test support of its 50% Fibonacci retracement that we discussed about one week ago, just over the 1700 price level. The 38.2% Fibo retracement was violated when the Nasdaq traded below 1800, which is now the new resistance level.

As earnings season begins to wind down, there is a good chance we will see some type of relief rally. But, until that happens, we continue to recommend caution on the long side of the market because there has been a pattern of negative earnings reports that has been spooking the market each day this week. Select sectors, such as the Pharmaceuticals, continue to show relative strength to the broad market. So, if you are buying the market here, consider looking in specific sectors, rather than the broad-based ETFs. For that reason, we remain long PPH (Pharmaceutical HOLDR).

Today’s watch list:

There are no new trade setups for today, although we remain long PPH from yesterday’s entry.

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:

    PPH long (from Aug. 11) –
    bought 72.70, new stop 72.20, target 74.65, unrealized points = + 0.50, unrealized P/L = + $50


We remain long PPH with the same stop as yesterday.

Edited by Deron Wagner,
MTG Founder and