The Wagner Daily


The broad market spent most of yesterday resuming the tight consolidation of the previous two days, but a rally during the final hour of trading pushed both the S&P 500 and Nasdaq Composite above their respective trading ranges to close at new highs. The S&P 500 Index gained 0.7%, while the Dow Jones Industrial Average moved 0.6% higher. Volume in the NYSE was flat versus the previous day. The Nasdaq Composite, however, closed 0.8% higher on volume that was 13% higher than Tuesday’s volume. It was the highest volume day in the Nasdaq since July 22, and also marked the seventh consecutive day of gains on above-average volume. Furthermore, six of those seven days were “accumulation days” in which the Nasdaq not only closed higher, but did so on volume that was higher than the previous day! Needless to say, the price to volume relationship in the Nasdaq has been quite bullish over the past two weeks, and is the reason the Nasdaq has failed to even retrace any of its recent gains.

Just as indexes typically don’t go straight down for an extended period of time without bouncing along the way, they rarely can sustain a parabolic rally without some form of correction during the move higher. When an index is trending very strongly, as the Nasdaq has done since its September 28 low, a correction can come in one of two ways: either a correction by price or a correction by time. In the case of an uptrend, a correction by price simply means that the index retraces off its highs for a short period of time before resuming its uptrend and moving higher. A correction by price, on the other hand, occurs when an index trades sideways in a narrow range, near its highs, for a short period of time before moving to new highs. This is referred to as “consolidation,” and is the more bullish of the two types of corrections. This is because a correction by price occurs when sellers step in and take profits on long positions, whereas a correction by time occurs when the buyers take a break, but sellers are nowhere to be found either. In both cases, the correction enables the intraday moving averages to rise up to meet the price of the index, which typically enables the index to resume its trend.

Looking at the hourly chart of the Nasdaq Composite, notice how the index has perfectly corrected by time by trading sideways, near its highs of its recent rally, during the past three days. This enabled the Nasdaq to come into support of its hourly uptrend line (illustrated by the blue arrow), which enabled the index to rally to new highs into yesterday’s close:

Consolidation days, as the Nasdaq experienced on October 4 and 5, can be boring for intraday traders because they often provide little opportunity in the way of volatility. However, those days were quite bullish in the “big picture” because they enabled the Nasdaq to form a base of support from which to rally to new highs.

Looking at the daily chart of the Nasdaq Composite, you will notice that yesterday’s rally pushed the Nasdaq through resistance of its 200-day moving average, which we have been focused on for the past several days:

Assuming it holds, the break above the 200-day moving average is obviously bullish for the Nasdaq in the intermediate-term. We expect the Nasdaq breakout to pull the Semiconductor Index higher as well, which is the reason we remain long SMH (Semiconductor HOLDR). However, to keep things in check, remember that the weekly downtrend line continues to lurk overhead as strong resistance on the Nasdaq. The primary downtrend line began with the high of January 2004 and currently converges around the 1,987 area. Bear in mind, however, that the S&P 500 continues to hold above prior resistance of its weekly downtrend line, which is likely to enable the Nasdaq to rally above its as well. Maintaining your long positions in the Nasdaq right now is a wise move, but you may want to be cautious of aggressively entering new long positions at current price levels. As for the bears, there is no good reason to be short the Nasdaq right now because the index has provided no bearish signals whatsoever within the past two weeks.

Today’s watch list:

There are no new plays for today, but we remain long SMH for swing. As discussed in recent newsletters, we also continue to maintain our long positions in the Gold/Silver Mining Index ($XAU), as well as the short positions in the Home Construction Index ($DJUSHB). ETFs do not exist for either sector, but you can create a synthetic ETF by trading a basket of the leading stocks within each sector.

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 (from Oct. 5) –
    bought 31.78, new stop 31.25, target 33.70, unrealized points = + 0.22, unrealized P/L = + $66


Note the new stop on SMH above.

Edited by Deron Wagner,
MTG Founder and