Commentary:

The broad market gapped down yesterday morning and never looked back, as each of the major indices closed significantly lower, near their intraday lows. The S&P 500 and Dow Jones Industrials each closed approximately 1.3% lower, while the Nasdaq shed 1.8%. Volume in the NYSE was 5% higher than the previous day, which made yesterday a bearish “distribution day.” Volume in the Nasdaq also increased, but only by 2%.

Yesterday’s losses caused the S&P 500 to close below its 200-day moving average for the first time since September 1. As you may recall from yesterday’s newsletter, the weekly downtrend line of the S&P acted perfectly as resistance. The daily chart of the S&P below shows the break of the 200-day MA:

The Dow Jones Industrial Average, which has been trading below its 200-day MA since September 15, also broke support of its 50-day MA yesterday:

The Dow began showing weakness immediately after testing resistance of its weekly downtrend line on September 7, and now the S&P has begun showing weakness after running into resistance of its weekly downtrend line. Regardless, the Nasdaq Composite continues to look okay on the daily chart and is still above support of its uptrend line from the low of August. The $SOX index also closed right at support of its 50-day moving average, which coincides with support of its uptrend line. This means the Semiconductor Index should begin to move higher again within the next several days. If it doesn’t, we will close the rest of our SMH long position. Check out how the $SOX closed right at support of its uptrend line and 50-day MA:

While yesterday’s losses may have seemed substantial, bear in mind that the major indices have climbed higher nearly every day since the lows of August 13. One or two “distribution days” can usually be absorbed by the broad market, but be on the lookout for additional distribution days, which could indicate that an intermediate-term top has been formed. If the $SOX holds support of its uptrend line and 50-day MA, it could pull the broad market higher, but the weight of the S&P and Dow will certainly be a factor that could negate any $SOX strength. Because of these mixed signals, we recommend cautions with entering any new positions on BOTH sides of the market.

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Today’s watch list:

QQQ – Nasdaq 100 Index Tracking Stock
Long

Trigger = above 35.15
(above yesterday’s close)
Target = 35.90 (resistance of the prior high)

Stop = 34.75 (below yesterday’s close)

Notes = QQQ has sold off down to support of its uptrend line from the August lows. This provides us with a low risk entry point on the long side.

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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:

SMH long (half position remaining from Sept. 10 and 17 entries) –
bought 30.13 (avg.), new stop 8 cents below the 20 minute low, target 32.95, unrealized points = + 0.92, unrealized P/L = + $138

Notes:

We have changed the stop on SMH to be 8 cents below the low of the first 20 minutes. If the low is never violated, we will remain long.

Edited by Deron Wagner,
MTG Founder and
President