The Wagner Daily


The broad market wrapped up the last day of May in an indecisive and choppy fashion, with each of the major indices closing moderately lower. Both the S&P 500 and Dow Jones Industrial Average sold off abruptly during the morning session, later attempted to reverse in the early afternoon, but fell victim to selling during the final thirty minutes. The sharp selloff into the close caused both the S&P and Dow to close at their intraday lows and post losses of 0.6% and 0.7% respectively. Although the Nasdaq Composite also closed lower, it maintained its recent pattern of relative strength that we discussed in yesterday’s Wagner Daily. The Nasdaq lost only 0.3% yesterday and, unlike both the S&P and Dow, actually closed near the middle of its intraday range. Many market-leading tech and biotech stocks also held firm to their recent gains, another bullish sign of the Nasdaq’s resilience.

Total market volume in the NYSE increased by 42% yesterday, while volume in the Nasdaq came in 40% higher than the previous day’s level. The surge in volume that accompanied yesterday’s losses initially seems quite bearish, but remember that the previous day’s volume was very low because of the holiday weekend. Despite the high percentage increases, turnover in both exchanges still came in below average levels. Therefore, yesterday was technically a bearish “distribution day,” but it did not have the feeling of heavy institutional selling. A rise above the 50-day average volume level in either exchange would have caused the bulls more reason for concern, but that was not the case.

Yesterday’s loss in the S&P 500 caused the index to close at the 1,191 support level we illustrated in yesterday’s Wagner Daily. The 1,191 area has become support due to the prior high from April, but that support level is somewhat minor, especially considering that the S&P lagged the Nasdaq throughout May’s rally. If the 1,191 level is broken, expect the S&P to find secondary short-term support at last week’s low of 1,185, which also converges with support of the prior low from February. The orange horizontal line on the chart below marks the 1,191 support level, while the blue horizontal line shows the secondary 1,185 support level. The usual moving averages have been removed so you can more easily see the areas of prior horizontal price support:

On a more exciting note. . . We have been targeting SMH (Semiconductor HOLDR) for long entry ever since the $SOX began showing relative strength last month, but we felt it rallied too far and too fast to secure a low-risk entry point after initially breaking its daily downtrend line. The good news, however, is that the $SOX corrected for the second consecutive session yesterday and it has now begun to form a new base of support. Because SMH and the $SOX index both closed the month of May above multi-year downtrend lines, a sideways consolidation at current levels would be very bullish. A breakout to new highs from such consolidation would also provide an ideal intermediate-term entry point to buy SMH.

We mentioned that the $SOX closed last month above a multi-year downtrend line, but did you realize that the downtrend line we are referring to goes all the way back to the year 2000 high? Put another way, the $SOX index broke out last month above a downtrend that has been in place for the past five years! As you can see on the monthly chart of the $SOX below, the index attempted to break out above its 5-year downtrend line in both February and March of this year, but failed to close above it on both occasions. But last month was different because the $SOX closed well above its monthly downtrend line. Take a look:

Now that the $SOX has broken out, we expect the prior downtrend line to now act as the new support level on any further price correction in the index. As for resistance, our upside target is the 560 level, which corresponds with the last major high from January 2004. SMH, which is the primary ETF associated with the Semiconductor stocks, also broke out above its 5-year downtrend line last month as well:

The upside target in SMH is about 10 points above its May closing price of 34.40, but bear in mind this would be an intermediate-term trade that would likely require patience to stay with the position for 2 to 3 months and hold through some minor corrections along the way. If you are comfortable with this idea, then be sure to reduce your position size accordingly so that you are not taking more capital risk by using the looser stops that are required. “Today’s Watchlist” below highlights the trigger and stop prices we are looking at for entry. BBH (Biotech HOLDR) also remains an ETF we are interested in, but we would like to see a bit more of a correction or at least consolidation first.

Today’s Watchlist:

SMH – Semiconductor HOLDR

Trigger = above 34.81 (above the high of the 3-day consolidation)
Target = 44.90 (just below the Jan. 2004 high)
Stop = 31.70 (below the 200-day MA support)

Notes = See commentary above for detailed commentary on the trade setup. Note that we are using a wide stop, but have a correspondingly wide target that gives us a 3 to 1 reward/risk ratio. You may want to adjust your share size to allow for the wider stop. We suggest only taking this trade if you are comfortable holding for intermediate-term time frame of 2 to 3 months. Otherwise, consider swing trading the relative strength in SMH instead.

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:

    UTH short (from May 13) –
    shorted 103.64, new stop 105.73, target 99.10, unrealized points = (1.54), unrealized P/L = ($154)


Per intraday e-mail alert, we adjusted the stop slightly in UTH and are keeping same stop today.

Edited by Deron Wagner,
MTG Founder and