The Wagner Daily


Technical resistance at the 2,100 level caused the Nasdaq Composite to reverse last Friday, dragging the other major indices with it as well. The Nasdaq lost 1.3% for the day, its biggest percentage drop since the 1.5% drop of April 28. Interestingly, the Nasdaq’s current uptrend began with the low of April 29. The S&P 500 lost 0.7%, while the Dow Jones Industrial Average shed 0.9%. Friday was the first day in weeks that the Nasdaq showed relative weakness to both the S&P and Dow. Nevertheless, the Nasdaq was deserving of a decent price correction given that the index had rallied more than 10% off its April 28 low with only five small losing days during that five-week period.

Even though the Nasdaq had its largest percentage drop in more than five weeks, it was positive that total market volume declined in both exchanges. Turnover in both the NYSE and Nasdaq came in 8% lighter than the previous day’s levels. Volume in both exchanges also came in below their respective 50-day average levels. Market internals in the Nasdaq were worse than the NYSE internals. Declining volume in the Nasdaq exceeded advancing volume by a margin of more than 3 to 1, but that ratio in the NYSE was negative by only 1.8 to 1. Friday’s selling was solid, but lacked the intensity that massive institutional selling would typically bring.

Although we have been focusing more on the resistance levels of the relatively weak Dow and S&P lately, the Nasdaq Composite also ran into a key area of resistance last Friday. The daily chart of the Nasdaq below illustrates how the index reversed at resistance of its prior highs from February and March:

The two red horizontal lines on the chart above mark the band of resistance between the 2,090 to 2,100 range. As you can see, the Nasdaq tried but failed to rally above that range twice in February and once in March. The Nasdaq’s inability to breakout above that range for three consecutive attempts created overhead supply from investors who, instead of taking their losses, held on to their positions going into the mid-March and April decline. However, now that the Nasdaq has rallied back to the highs of February and March, those same people who previously failed to cut their losses are now selling their positions at current levels in a vain attempt to “just breakeven.” This cycle of events is how overhead supply and horizontal price resistance levels are created.

In addition to resistance of the prior highs, the Nasdaq also closed last week just below resistance of its 61.8% Fibonacci retracement from its January 3 high down to its April 29 low. The major Fibonacci retracement levels are illustrated on the weekly chart below:

There is no doubt the Nasdaq Composite has been acting very well during the past five weeks, but the combination of the prior highs from February and March, as well as the 61.8% Fibo retracement, is likely to cause the index to correct in the coming week. If, however, the Nasdaq trades sideways and consolidates near its highs rather than retracing further in price, it would be rather bullish. Sideways consolidation would indicate the bulls are taking a break, but the bears are not rushing in either. Remember that the Semiconductor Index ($SOX) just broke out above a 5-year downtrend line and closed last week higher, despite a lower weekly close in the Nasdaq. The $SOX usually leads the Nasdaq, not the other way around. Therefore, we feel the relative strength in the $SOX will enable the Nasdaq to correct by time (consolidate) rather than retrace significantly in price. But the one thing that could change that scenario is the continued weakness in the Dow.

Within the past two weeks, we have discussed the relative weakness of the Dow on several occasions. Specifically, we discussed how the Dow has only traded sideways while the Nasdaq was rallying higher nearly every day. The Dow has been trying to rally above its prior highs from March and April for the past two weeks, but it has failed thus far. Friday’s selloff caused the Dow to close in the lower end of its two-week trading range and just above support of its 200-day moving average. We expect the Dow to test support of its 200-day MA (circled on the chart below) within the next several days:

As for the S&P 500, there is nothing special going on with its daily chart. The index has been stronger than the Dow, but lagging the Nasdaq. Short-term support is at the 1,191 level. Below that, the 20-day MA should provide support at the 1,183 level.

Now that the Nasdaq has run into a significant resistance level, this week’s performance will tell us a lot about how strong the index really is. It is probably not a good time to initiate new long positions at this point, but many leading individual stocks are holding onto their recent gains and breakout levels. Therefore, continue to trail stops on any existing positions and wait for the market to prove it can correct in a healthy and orderly fashion before buying on the first minor correction.

Today’s Watchlist:

RTH – Retail HOLDR

Trigger = below 93.90 (below Friday’s close)
Target = 88.30 (support of the May 2005 low)
Stop = 96.10 (above last week’s high)

Notes = RTH has been in a downtrend on its weekly chart for the past three months, but has bounced into a major resistance level that provides a low-risk entry point to enter a new intermediate-term short position. The 40-week MA, as well as major horizontal price resistance at the 94 to 95 range, stopped last week’s rally attempt. We now feel RTH is poised to head back down to test its prior lows.

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 June 1) –
    bought 34.82, stop 31.70, target 44.90, unrealized points = (0.00), unrealized P/L = + $0


No changes to positions.

Edited by Deron Wagner,
MTG Founder and