Commentary:

The broad market followed up last Friday’s gains with a day of healthy, lower volume consolidation. Each of the major indices opened near unchanged levels, then spent the remainder of the day trading in a tight and narrow sideways range. The Nasdaq Composite closed 0.2% lower, which was a mild retracement considering the previous day’s 1.4% gain. The S&P 500 Index lost only 0.1% and the Dow Jones Industrial Average was unchanged. Total market volume in the NYSE came in 18% lower than the previous day, while volume in the Nasdaq was 12% lighter. It was bullish that volume dropped off significantly while the market caught its breath because it indicates the buyers were simply taking a break, rather than the sellers aggressively taking control. Bulls only want to see higher volume on days when the major indices close higher than the previous day.

Yesterday’s lower volume consolidation day had little impact on the short-term technical view of the major indices. Both the S&P 500 and Dow Jones Industrials remain firmly above their 50-day moving averages, which they rallied back above on February 4. Because both indices retraced more than two-thirds of their January losses, the next major resistance will not occur until the prior highs from December. For the S&P, the December high is 1,217. Resistance of the December high on the Dow is at 10,868. Near-term support will obviously be found at their respective 50-day moving averages. The daily charts of both indices below illustrate these support and resistance levels to watch:

Because the Nasdaq Composite has been lagging behind the recent recovery in both the S&P and Dow, the index still has overhead resistance of its 50-day moving average, which is presently at 2,108. Near-term support is at the February 3 low of 2,049. The Semiconductor Index held up great yesterday, as it closed flat and retained all of the previous day’s 4.4% gain. If the $SOX strength continues, it should enable the Nasdaq to “catch up” to both the S&P and Dow because the Nasdaq is so heavily weighted with Semiconductor-related stocks. The one problem, however, has been the relative weakness in Internet stocks, many of which have virtually ignored the broad market’s recovery during the past two weeks. Because of the divergence between the Semiconductor and Internet stocks, the Nasdaq itself may become choppy and indecisive. For this reason, we feel it is a better risk/reward ratio to trade the sector-specific ETFs such as SMH rather than the broad-based ones like QQQQ. Per intraday e-mail alert to subscribers, we bought SMH (Semiconductor HOLDR) on yesterday’s intraday pullback, which provides a positive risk/reward ratio.

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Today’s watch list:

There are no new positions, although we are now long SMH.

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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 (from Feb. 7) –
bought 32.55, stop 31.49, target 34.90, unrealized points = + 0.10, net P/L = + $30

Notes:

Per intraday e-mail alert, we bought SMH yesterday.

Edited by Deron Wagner,
MTG Founder and
President