The Wagner Daily


The broad market closed slightly higher yesterday, as the major indices continued to digest their May gains by consolidating in a sideways range. The S&P 500 gained 0.3% and the Dow Jones Industrials gained 0.2%, but the Nasdaq Composite was unchanged. Tech stocks continued their recent corrections, which caused the Nasdaq 100 Index to lose 0.3%, but the Russell 2000 Small-Cap Index gained 0.8% and set a new three-month high. The S&P Mid-Cap Index also moved 0.3% higher and closed at a new all-time high.

Volume was mixed yesterday, which is common to see when the major indices are stuck in a trading range. Total volume in the Nasdaq declined by 2%, but volume in the NYSE came in 4% higher than the previous day’s level. This means that the S&P and Dow registered their second consecutive “accumulation days,” albeit on minimal percentage gains. Conversely, the slight decline in Nasdaq volume should actually be considered a positive. Even though the Nasdaq Composite was flat, the tech-heavy Nasdaq 100 closed lower. Therefore, a drop in volume is good if for the bulls.

In the June 13 issue of The Wagner Daily, we pointed out how the S&P Mid-Cap Index (and MDY) had been showing relative strength to the other major indices for the past several months. As such, we anticipated that the index would be the first to set new highs when the broad market bounced, which is exactly what happened yesterday. We find it very interesting that the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each remain well below their year 2000 highs, but the S&P Mid-Cap Index just set a new all-time high! Below are long-term monthly charts of both SPY (S&P 500 Index) and MDY (S&P Mid-Cap Index) that illustrate the major divergence:

As you can see, SPY has only retraced about 50% of its losses from its year 2000 peak down to its 2000 low, but MDY is sitting at a new all-time high. The divergence, which has been in effect for the past several years, shows that institutional money continues to favor mid-cap stocks over the long-term. Similarly, the Russell 2000 Small-Cap Index (and IWM) also continues to trade above its year 2000 high, showing that institutions are maintaining their long-term appetite for aggressive-growth companies. This is important because small cap stocks often lead bull markets. On a separate note, notice how both SPY and MDY are showing increasing volume over the past several years. This is indicative of how ETFs in general have been gaining in popularity.

While on the subject of long-term charts, let’s discuss the bullish trend reversal that is taking place on PPH (Pharmaceutical HOLDR). As the chart below illustrates, PPH has just broken out above a 5-year downtrend line after forming a double bottom over a two-year span:

The double bottom on PPH is bullish, and the break of the downtrend line confirms the trend reversal. As such, we feel PPH is an ETF you may want to consider for a long-term trade idea that you can sit on for the next year or two, perhaps in your IRA. If you do, consider a stop below the April low of $71.16, as PPH should not retrace much below the prior downtrend line. Such a stop price means you are risking 3.5 points on the trade, but have the ability to capture a much larger gain on the upside. If, for example, PPH retraces just 50% of its loss from the 2000 high down to the 2002 low, you are looking at a rally up to the $87 area. This would provide you with a 13 point gain. Remember, however, that you are looking at a monthly chart, which means you need to have a long-term time horizon if you take this trade. Trades like this are ideal for setting a GTC (good til canceled) stop order and “forgetting” about the position, as opposed to watching its price on a daily basis.

As for the short-term charts of the major indices, it’s the same story as the past two weeks. The indices are digesting their May gains by trading sideways in a healthy consolidation pattern. Keep a close eye on the 20-day moving average of the Nasdaq Composite (currently at 2,062), as it has perfectly acted as support for the past three days. Odds are good the 20-day MA will act as a springboard for the Nasdaq to break out of its range within the next few days. But if the Nasdaq closes below it, we could see a substantial price retracement. The $SOX Index closed a few points below its 20-day MA yesterday, but still has support of its 200-week MA and prior multi-year downtrend line below. 1,190 is short-term support on the S&P, while pivotal resistance on the Dow continues at 10,550 to 10,570.

Today’s Watchlist:

BBH – Biotech HOLDR

Trigger = above 168.45 (above three-day high)
Target = new highs (will trail stop)
Stop = 165.10 (below yesterday’s low)

Notes = BBH has been in a solid uptrend for the past two months, but has finally corrected down to support of its 20-day moving average. It has been consolidating in a tight range, which is bullish, so we soon anticipate a reversal back up to the prior high. Notice also how the correction has been on lighter volume, which is what you want to see. BBH is quite volatile, so be sure to reduce your share size accordingly. See the MTG
Position Sizing Model
for more details.

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:

    RTH short (from June 9) –
    shorted 94.55, covered 96.40, points = (1.85), net P/L = ($187)

Open Positions:

    PPH long (from June 7) –
    bought 74.56, stop 73.20, target 79.60, unrealized points = + 0.09, unrealized P/L = + $9

    SMH long (from June 1) –
    bought 34.82, stop 32.10, target 44.90, unrealized points = (0.66), unrealized P/L = ($198)


RTH stopped out, but we remain long both PPH and SMH with same stop.

Edited by Deron Wagner,
MTG Founder and