The Wagner Daily


The widely expected quarter point rate hike from the Feds yesterday failed to move the broad market out of its narrow, sideways range that has now been intact for the past four days. The major indices once again spent the first half of the day trading near unchanged levels, then briefly spiked higher after the FOMC announcement, but eventually closed slightly negative and near their intraday lows. For the third consecutive day, the S&P 500 Index closed 0.1% lower, while the Dow Jones Industrial Average closed flat. We find it interesting that both of those indices closed with exactly the same percentage change for three days in a row. The Nasdaq Composite also closed lower this time, by 0.4%. A negative report from Cisco (CSCO) triggered weakness in several of the large cap tech stocks, which acted as an anchor on both the Networking and Semiconductor sectors. Total market volume in both the NYSE and Nasdaq also increased by 4% and 8% respectively.

Because the S&P 500 has only corrected by a total of 0.3% during the three days since its recent rally ended, we could easily assume this is bullish due to the mildness of the retracement. However, it’s important to note that volume in the NYSE has also increased during the past two days of losses. This technically means the last two days were bearish “distribution days” because turnover increased, but prices went sideways to lower. This is akin to stepping on the accelerator of a car too quickly, which will cause it to spin its wheels but not go anywhere. The Nasdaq also had a “distribution day” yesterday, but had a bullish “accumulation day” on Tuesday.

We do not yet have quite enough confirmation to enter new short positions, but the past two days of distribution in the NYSE has definitely put us on alert. A healthy market can usually absorb two to three days of distribution within a two week period, especially given the prior days of accumulation during the recent rally. But, the broad market will eventually succumb to lower prices if the distribution continues. If all this talk of accumulation and distribution confuses you, realize it’s quite simple and there is no magic to the concept. Think about it in simple terms; a market must go lower if supply exceeds demand, while it must go higher if demand exceeds supply. By closely following the broad market’s price to volume ratios, we get a clear picture of whether supply is exceeding demand, or vice versa. Remember volume is the one technical indicator that never lies and is the most reliable forecasting tool at our disposal.

Although the major indices closed within the range of their prior consolidation, one thing that got our attention was the relative weakness in the Semiconductor Index ($SOX), which shed 2.4% yesterday. Because the $SOX was hovering near the breakout point of its weekly downtrend, yesterday’s weakness is important to note. As we have been saying, the Nasdaq is unlikely to rally above its prior highs at the 2,050 area unless the $SOX also breaks out above its resistance. But if yesterday’s action was any indication, it appears the Semis will have a hard time doing so.

Since rallying above its prior highs on October 27, the $SOX had been consolidating near its recent highs and was poised to break out. But yesterday’s weakness brought the index back down below its prior highs from October. The $SOX still could rally from here, but now there is additional overhead supply created from yesterday’s selloff. The daily chart of the $SOX below illustrates the break down below support of its consolidation:

Looking at the longer term weekly chart, you can see that the $SOX has begun to resume its primary downtrend line that has been intact for nearly a year:

If the $SOX can manage to hold its current level, there is still a chance it will rally to a new high and break above its downtrend line. But, until that happens, we have to assume the weekly downtrend line will remain intact, as it has been for the past eleven months. Going into today, continue also to keep an eye on that pivotal 1,163 area on the S&P, which is the prior 52-week high from March. So far, it is holding above it just fine, but a slide below it could trigger selling due to traders’ expectations of a bearish double top being formed on the weekly chart. The Nasdaq being stuck below the 2,050 area doesn’t help much either. On the positive side, a rally to new highs of the week in any of the major indices would be quite bullish. Furthermore, the consolidation (correction by time) of the past several days would make it relatively low risk to buy the broad-based ETFs if new highs of the week are printed. Either way, continue to be cautious and ready to change direction at a moment’s notice because both the S&P 500 and Nasdaq Composite are at “make it or break it” levels.

Today’s watch list:

IEF – iShares 7 – 10 year T-bill index

Trigger = below 84.72
(below yesterday’s low)
Target = 83.40 (61.8% Fibo retracement of last primary move higher)

Stop = 85.30 (above yesterday’s high)

Notes = IEF (and the other bond ETFs) are poised to break support of their prior lows after barely setting a higher high on the last rally attempt. We feel yesterday’s FOMC meeting will put further downward pressure on bond prices, which move inversely to yields. Therefore, we are looking to short IEF on a break below yesterday’s low.

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:

    SMH long (from Nov. 8) –
    bought 33.10, closed 32.14, points = (0.96), net P/L = ($294)

Open Positions:



SMH gapped down below our stop, so we used the MTG Gap Rules to adjust the stop below the 20 minute low, which was taken out shortly thereafter. We are now flat the ETFs.

Edited by Deron Wagner,
MTG Founder and