Commentary:
The Nasdaq Composite spent yesterday morning in a downtrend, but, fueled by strength in the Semis, reversed at mid-day and rallied sharply throughout the afternoon. Although the Nasdaq closed 1.0% higher, both the S&P 500 and Dow Jones Industrial Average lagged considerably, gaining 0.2% and losing 0.2% respectively. Most impressive was yesterday’s 5.3% gain in the Semiconductor Index ($SOX), its largest single day increase in months. As most industry sectors showed weakness yesterday, the 1% gain in the Nasdaq was primarily the result of strength in the semis. In yesterday’s newsletter, we spoke about the possibility that the Dow will begin to show weakness over the next several weeks, while the Nasdaq shows strength. If yesterday’s action was any indication, this may very well become the situation.
Volume in the Nasdaq increased by 14% over the previous day, while volume in the NYSE was 9% higher. This is notable because it was the first day since August 12 that volume on both the NYSE and Nasdaq came in above the 50-day average levels. It appears volume is starting to return to the markets and that the Summer doldrums are coming to an end. At the least, we should begin to see more smoothly trending days, which rarely happen when volume is too light.
The $SOX Index, which has been in a steady downtrend since the beginning of the year, suddenly showed some signs of life yesterday. Many individual stocks within the index showed confirmed signs of institutional buying, as they closed sharply higher and on higher volume. Despite yesterday’s 5% gain, the index is still 34% off its peak from January of 2004. Since June, the 20-day moving average has acted firmly as resistance on the $SOX, but we feel the index may rally above this resistance within the next several days. The daily chart of the $SOX below illustrates how the index closed within striking distance of its 20-day MA yesterday:
Needless to say, we plan on buying SMH (Semiconductor HOLDR) when/if the $SOX rallies above its 20-day moving average resistance. Such an event would represent a break of a multi-month downtrend line and should cause the index to at least rally up to the 400 level, which is convergence of both the 50-day MA and the 38.2% Fibonacci resistance level. Most likely, this would also pull the Nasdaq along with it, so you may also consider buying QQQ (Nasdaq 100 Index), as well as the SMH. Furthermore, the Nasdaq Composite closed above its 50-day moving average for the first time since July 2, so this also generates bullish signals on the Nasdaq. Being short the Dow (DIA), however, is a great hedge.
Today’s watch list:
SMH – Semiconductor HOLDR
Long
Trigger = above 29.55 (above the 20-day MA and yesterday’s close)
Target = 31.55 (resistance of the 50-day MA)
Stop = 28.40 (below yesterday’s consolidation)
Notes = See commentary above regarding reason for long entry in 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:
-
(none)
Open Positions:
-
DIA short (from Sept. 9) –
shorted 103.01, stop 104.08, target 100.95, unrealized points = + 0.03, unrealized P/L = + $6
Notes:
The DIA short triggered for entry yesterday.
Edited by Deron Wagner,
MTG Founder and
President