The Wagner Daily


The broad market continued its four-day pattern of divergence, as the Nasdaq closed positive and the Dow once again closed flat. The Nasdaq maintained its recent trend of leadership, as the tech-heavy index closed 0.3% higher. The S&P 500 Index gained 0.2%, but the Dow Jones Industrial Average closed flat for the second consecutive day. For both the S&P and Nasdaq, it was the fourth consecutive day of gains, although the Nasdaq has far outperformed the S&P. Total market volume in both the NYSE and Nasdaq declined yesterday, and was 7% and 13% lower than the previous day respectively. Nevertheless, volume in the Nasdaq still came in above average for the fourth day in a row. This, of course, confirms that institutions have been behind the recent rally.

Despite the fact that both the S&P 500 and Nasdaq Composite closed higher, yesterday was essentially a day of correction. The intraday trading ranges of each of the major indices was contained completely within the ranges of the previous day. Because this occurred at the top of a multi-day rally, yesterday was considered to be a “consolidation day.” When markets correct from a multi-day rally, they either correct by price (retracement) or they correct by time (consolidation). Of the two, a correction by time is more bullish than a correction by price because it means the market was so strong that it did not even retrace any of the gains. Instead, a correction by time means that the market trades sideways, near the top end of the range, which enables the intraday moving averages to rise up and provide support.

One example of how a market can correct by time rather than price is the Semiconductor Index ($SOX). The $SOX gained an impressive 11% in the prior three days, but refused to give back any of the gains yesterday. Instead, the $SOX closed flat, demonstrating that the buyers were simply taking a break, rather than the sellers stepping in. The hourly chart of the $SOX below illustrates how yesterday’s sideways action in the index enabled the 20-period moving average to rise up and provide support in the afternoon. Also notice how the 20-period MA converges with the uptrend line from the low of September 9:

If this uptrend line remains intact, we should see further upside over the next several days. The daily chart of the $SOX below illustrates the resistance of the 50-day moving average, which is the level at which we sold half our long position in SMH two days ago. However, a rally above the 50-day MA would be powerful and would probably cause the $SOX to rally up to its prior high from August 2, which is around the 419 level:

We have written much about the $SOX during the past several days because the index is so heavily weighted within the Nasdaq. Therefore, the Nasdaq usually tends to follow the direction of the $SOX. For this reason, we feel there is more upside in the Nasdaq, which should rally up to resistance of its weekly downtrend line, around the 2,000 level. However, the Dow and S&P are not confirming the strength and could both act as a weight on the Nasdaq. We’re covered either way, as we remain long half position of SMH, but short DIA.

Today’s watch list:

There are no new plays for today, although we remain long SMH (half position) and short DIA from last week.

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 (HALF position, from Sept. 10) –
    bought 29.56, new stop 29.56, new target 32.95, unrealized points = + 1.52, unrealized P/L = + $225

    DIA short (from Sept. 9) –
    shorted 103.01, new stop 103.87, target 100.95, unrealized points = (0.49), unrealized P/L = ($98)


Note the new stop in DIA short.

Edited by Deron Wagner,
MTG Founder and