Commentary:

The broad market followed through on Monday’s gains yesterday, as each of the major indices closed modestly higher. The day began with a decent opening gap up, but the upward momentum quickly faded after the first thirty minutes of trading. This caused both the S&P 500 and Nasdaq Composite to trade in quiet, sideways ranges before finally closing near their intraday lows. The Nasdaq Composite tacked on another 0.7% gain, while the S&P 500 and Dow Jones Industrial Average each gained 0.2%.

Volume in the NYSE increased by 5%, while volume in the Nasdaq was 7% higher than the previous day. This means that yesterday was a bullish “accumulation day,” which occurs when the major indices close higher and on higher volume. It was the second consecutive accumulation day for the NYSE, but, unfortunately for the bulls, volume still came in below its average levels on both indices. Despite the gains of the past two days, we still have not seen a confirmed return of institutional buying that would be indicated by higher than average volume levels.

The S&P 500 finally closed above the 1080 resistance level we have been discussing for the past week, but is still below the key resistance of its primary downtrend line from the high of June 30. Going into today, the prior resistance of 1079 – 1080 should now act as the new support level, while resistance of the downtrend line will be found around the 1090 level. As we mentioned yesterday, be very cautious on the long side of the market unless the S&P closes firmly above its downtrend line and on strong volume. Take a look:

The daily chart of the Dow Jones Industrial Average looks similar to the S&P in that the index closed above resistance of last week’s high, but still has overhead resistance of its primary downtrend line. Prior resistance becomes the new support once the resistance is broken, so we expect last week’s high, illustrated by the blue horizontal line below, to act as support going into today:

Like the S&P 500 and Dow Jones Industrials, the Nasdaq Composite will also need to contend with resistance of its primary downtrend line before we can begin to feel bullish about the market. Horizontal price resistance from last week’s high around the 1810 area has also converged with the downtrend line, which will make the resistance even more difficult to push through. The daily chart of the Nasdaq below illustrates this:

The three charts of the major indices above are pretty straightforward, so watch those pivotal support and resistance levels illustrated above in order to better gauge on which side of the market to position yourself. Above all, continue to watch for an increase in volume on any rally attempt above the downtrend lines. If the indices fail to hold at current levels, we may have some good short selling opportunities within a few days, but it’s still a bit too early to determine whether or not that is the best plan of action. As always, remember to trade what you see, not what you think!

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Today’s watch list:

There are no new plays, but we remain long both PPH and SMH.

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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:

(none)

Open Positions:

PPH long (from Aug. 11) –
bought 72.70, stop 72.50, target 74.65, unrealized points = + 0.85, unrealized P/L = + $85

SMH long (from Aug. 16) –
bought 29.10, new stop 29.10, target 31.30, unrealized points = + 0.38, unrealized P/L = + $114

Notes:

We remain long both SMH and PPH. Note the new stop on SMH above.

Edited by Deron Wagner,
MTG Founder and
President