The Wagner Daily


The broad market wrapped up last week with its strongest performance since the new year began, as each of the major indices rallied above pivotal resistance levels on their daily charts. The Nasdaq, which saw the biggest percentage loss of the major indices in January, bounced back sharply and gained 1.4%. The S&P 500 and Dow Jones Industrials also registered solid gains of 1.1% and 1.2% respectively. Volume increased by 6% in the NYSE, giving the S&P and Dow their third bullish “accumulation day” within the week. Volume in the Nasdaq, however, was a bit disappointing and declined by 3%.

The most important thing about last Friday’s session was the sudden strength in the Semiconductor Index ($SOX), which rocketed more than 4% higher on the day! The $SOX has been significantly lagging behind the broad market for many months, but Friday’s performance may be indicating a potential shift in institutional sector rotation. Many individual stocks within the $SOX broke out above their weekly downtrend lines, many of which had been in place for more than a year. To get an idea of how much the Semis have been lagging behind the broad market, check out the one-year “percent change” chart that overlays the S&P 500 Index with the Semiconductor Index. Notice how the Semiconductor Index is down 18% during the past twelve months, while the S&P 500 is up 5% during the same period:

MTG focuses on buying strong sectors and shorting weak ones, which is why we have not been trying to pick a bottom in the $SOX index. However, we also are constantly on the lookout for signs of institutional sector rotation and money flow from one sector into another. If Friday’s action was indicative of anything, it’s that institutions suddenly, for whatever reason, decided to begin buying the Semis. Obviously, one day of strength does not necessarily mean a downtrend will reverse, as it could have simply been aggressive short covering. However, be on the lookout for potential upside follow-through in the Semis this week. Particularly, pay attention to whether or not volume increases for individual stocks throughout the index, which would be the hallmark of institutional accumulation. If you desire to wait for a clear, confirmed breakout in the $SOX, wait for a breakout above the 200-week MA, which the index has been trading below for a whopping three years! On the weekly chart below, notice how the $SOX has reversed after hitting its 200-week MA on numerous occasions throughout the past year:

Since we spent most of last week analyzing the daily charts of the major indices, let’s take a quick look at the longer-term weekly charts of the major indices, which will provide us with a “big picture” point of view. While the January selloff may have felt pretty severe, a quick glance at the weekly chart shows the S&P 500 perfectly found support at its prior high from the March of 2004. On the weekly chart below, notice how the S&P 500 Index has perfectly bounced off support of its prior high, which is annotated by the blue horizontal line:

On an intermediate-term basis, we can clearly mark the January low of 1,163 as key support. Intermediate-term resistance is obviously the December high of 1,217. Last week’s 2.7% gain in the S&P 500 was enough to recover more than two-thirds of January’s loss. Because the index has retraced more than two-thirds of January’s loss, odds are now good the index will at least re-test its December high in the coming weeks. Whether or not it breaks out to a new high is another story altogether, but keep a close eye on volume in order to determine the likelihood of that happening. Thus far, volume on the “up” days has not been all that spectacular, and the broad market is lacking the necessary “accumulation days.” If the S&P 500 does manage to rally above its December 2004 high, it will still have to contend with resistance of its 61.8% Fibonacci retracement, as measured from the year 2000 high down to the 2002 low. That resistance level is around 1,238. Next, take a look at the weekly chart of the Nasdaq Composite:

As we have been discussing for months, the Nasdaq Composite has been lagging behind the S&P 500. During January, the S&P retraced down to support of its 2004 high and then reversed. The Nasdaq, however, failed to confirm a break out above its 2004 high in the first place. When the S&P broke out in November of last year, the Nasdaq formed a double top instead. In January, the index retraced approximately one-third of its rally from its August 2004 low to its December 2004 high. Needless to say, the Nasdaq has more overhead supply to eat through on the way back up, but a return of leadership in the Semiconductor Index would likely provide enough momentum for the Nasdaq to at least rally back up to its December 2004 high. Keep a close eye on the $SOX Index because we feel that strength in this index will cause the Nasdaq to play “catch up” with both the S&P and Dow in the coming weeks.

Today’s watch list:

We are considering a long entry in SMH (Semiconductor HOLDR), but are a bit hesitant due to overhead resistance of the 200-day MA. It’s also likely that SMH may simply trade sideways today, in order to digest Friday’s large percentage gain. Most likely, we will see if it follows through today and will look to enter tomorrow if it acts well today. However, we will send an e-mail alert if/when we decide to take a position today instead. More aggressive traders may wish to do this, placing a stop near a 2/3 retracement of Friday’s range.

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:

    DIA short (from Jan. 20) –
    shorted 104.95, covered 106.22, points = (1.27), net P/L = ($258)

    IWM short (re-entry, from Feb. 1) –
    shorted 124.72, covered 126.25, points = (1.53), net P/L = ($156)

Open Positions:



Both short positions in the broad market were stopped out, as the major indices each rallied above their short-term resistance levels. The RTH short setup did not trigger. As for the broad-based ETFs, all bets are off on the short side (at least in the short-term).

Edited by Deron Wagner,
MTG Founder and