The Wagner Daily


Stocks sprinted higher out of the gates yesterday morning, but tripped and fell in the afternoon. Within the first hour of yesterday’s trading, each of the major indices were trading approximately 1% higher and showing strong market internals. But the Nasdaq once again ran into resistance at the 2,100 level, causing the bears to quickly take control in the afternoon. The reversal forced the Nasdaq to not only give up its early gain, but to close 0.4% lower. The Dow Jones Industrial Average also fell hard in the afternoon, but still managed to close 0.2% higher. The S&P 500 was unchanged by the closing bell. Each of the major indices also closed at their intraday lows, causing bearish “inverted hammer” and “gravestone doji” candlestick patterns to form on their daily charts, as well as on the charts of many sector indices and individual stocks.

Unlike recent down days in the market, total market volume increased sharply in both exchanges yesterday. Volume in the NYSE increased by 23%, while volume in the Nasdaq surged 25% above the previous day’s level. This gave the Nasdaq a clear “distribution day,” but only its first one of the month. It was technically not a “distribution day” in the NYSE because the Dow closed slightly higher and the S&P was unchanged, but the bearish afternoon reversal, substantial increase in volume, and closing prices at the intraday lows was enough to declare it a day of institutional selling in the NYSE as well. The first entrance of higher volume selling should be interpreted as a yellow “caution” flag to the bulls, but one day of institutional selling is usually not enough to cause an uptrend to fall apart. Nevertheless, pay attention to the price-volume relationship of the broad market throughout the remainder of the week. Two or more days of higher volume selling could cause a substantial retracement in the major indices.

Yesterday was the fourth time within the past five sessions that the Nasdaq Composite came within five points of the 2,100 level, but failed to break through it. On both June 3 and 7, the index sold off sharply upon testing that resistance level. Yesterday’s close of 2,067 put the index at the low of its recent trading range as well. Any further weakness in the Nasdaq will probably cause the index to drop down to the next support of its 20-day moving average, presently at 2,038. The horizontal line on the chart of the Nasdaq below marks support of the recent trading range:

As for the S&P and Dow, the same support and resistance levels we have been discussing remain intact. The S&P needs to hold support of the 1,190 level, although secondary support of the 20-day MA is just below that at 1,185. The Dow Jones closed sixty points above convergence of its 20 and 200-day moving averages, presently at 10,423. A break below that support level could easily trigger a negative change in overall market sentiment because the 200-day moving averages are so closely watched as an indicator of the market’s long-term health. On the upside, there continues to be rock solid resistance at the 10,550 to 10,570 area. As for the semis, both SMH and the $SOX index closed just above support of their respective 200-week moving averages, which we looked at in yesterday’s newsletter.

One day of heavier selling certainly does not mean we should start shorting everything, as the Nasdaq was overdue for a correction in the first place. However, it may be prudent to hold off on entering new long positions until we see how the market follows-up to yesterday’s bearish intraday reversal. We still feel confident the $SOX index will hold the Nasdaq up through this correction, but we plan on just managing our existing long positions instead of entering new ones at current levels. A few well-placed shorts within the sectors showing the most relative weakness may be a good idea to help reduce your overall risk on any long positions. But only short the sector ETFs and/or stocks showing relative weakness to the broad market.

Today’s Watchlist:

RTH – Retail HOLDR

Trigger = below 94.52 (below hourly uptrend line and 200-day MA)
Target = 88.30 (support of the May 2005 low)
Stop = 96.35 (above last week’s high)

Notes = This trade setup did not trigger the past two days, but we are listing it again today. The setup is even better now due to failure at the primary weekly downtrend line (above). Also note the new trigger and stop prices above. 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:

    PPH long (from June 7) –
    bought 74.56, stop 73.20, target 79.60, unrealized points = (0.30), unrealized P/L = ($30)

    SMH long (from June 1) –
    bought 34.82, stop 31.70, target 44.90, unrealized points = (0.59), unrealized P/L = ($177)


Per intraday e-mail alert, we entered PPH long about 10 cents before its original trigger price.

Edited by Deron Wagner,
MTG Founder and