The Wagner Daily


The positive start to the shortened week fizzled out yesterday, as the broad market promptly gave back its gains from the previous day. Both the S&P 500 and Dow Jones Industrial Average trended lower throughout the day and closed its losses of 0.8% and 1.0% respectively. The S&P 500 barely managed to hold the prior day’s low, but the Dow Jones closed at its lowest level of the past seven weeks. The Philadelphia Semiconductor Index ($SOX) showed relative strength and gained 1.1% higher yesterday, but broad-based weakness in the Dow and S&P caused the Nasdaq to post a loss. After an extremely choppy session, the Nasdaq Composite eventually closed 0.5% lower, a fifty percent retracement of the previous day’s gain. The S&P 400 Mid-Cap Index, which closed at a record high the previous day, gave back 0.6%. The Russell 2000 Small Cap Index shed 0.8%.

Total volume in the NYSE rose by 7%, while volume in the Nasdaq came in 11% higher than the previous day’s level. Because the major indices closed lower and on higher volume, yesterday was a “distribution day,” indicating institutional selling activity. Although the prior day was conversely an “accumulation day,” remember we cautioned that volume still came in below average levels. Therefore, the occurrence of a bearish “distribution day” following an “accumulation day” did not come as a big surprise. Yesterday marked the third day of institutional distribution within the past four weeks. One to two more “distribution days” over the next week would surely serve as a warning to astute bulls.

As we have been discussing for the past month, the Dow Jones Industrial Average continues to lag the other indices. On “up” days in the broad market, the Dow usually gains less than the S&P 500 and Nasdaq Composite, while “down” days in the broad market typically have seen the Dow posting the largest percentage losses. As an example of this, consider the past two days of broad market action. Yesterday’s losses caused the Nasdaq to give back half of its prior day’s gain and the S&P 500 retraced all but 0.1% of its prior day’s gain. But the Dow Jones lost all of its prior day’s gain and an additional 0.3% beyond that. If you overlay the charts of the major indices throughout the past six weeks, you will see that similar scenarios have been commonplace due to the Dow’s relative weakness. Because the Semis and many Small Caps remain strong, it is tricky to advise shorting the broad market at current levels. However, DIA (Dow Jones Tracking Stock) would be the first broad-based ETF to consider shorting if the other indices began to lose support as well. As the daily chart below illustrates, the Dow is now hanging on to support by a thread:

The blue horizontal line on the chart above marks key support at the 10,255 area. A break below that would probably send the Dow down to support of its prior intraday low from May 13 (10,075). Since the June 23 and 24 selloffs, notice how the Dow has been unable to recover back above any of its major moving averages. The fact that the 20, 50, and 200-day moving averages are firmly above the price of the Dow is bearish and could easily cause new lows to form on the Dow in the intermediate-term. Taking a look at the long-term monthly chart of the Dow, the technical picture is even more precarious:

As you can see, the Dow is in danger of breaking support of its two and a half year uptrend line. If it does, we could easily see a drop down to its 40-week moving average around 9,620, which is also in the same vicinity as its prior major low from October 2004. However, unless downside momentum suddenly builds, such a drop would probably take several more months.

The Dow is obviously in pretty bad technical shape right now, but don’t forget that the Small and Mid-Cap indices are hanging out in record high territory. The $SOX Index is also showing resilience by holding above its 200-week moving average and outpacing the Nasdaq. Therefore, any shorts in the Dow-type stocks or ETFs should be cautiously approached, perhaps by hedging your bet with a few long positions in the Nasdaq sectors such as tech or biotech. We would, however, avoid the internet-related stocks because the $GIN index is breaking down and appears to be losing support. Large-cap, traditional tech names such as Intel and Texas Instruments are starting to shine again.

Today’s Watchlist:

We were planning on listing DIA as a short setup for today. However, news of a possible terrorist attack in London just came across the wires and the S&P futures are now gapping down more than 20 points as of the time of this writing. As such, DIA will probably gap down to open way below our intended entry point, thereby reducing the risk/reward ratio of the trade setup. We will, however, send an intraday e-mail alert to monthly subscribers if/when we enter DIA or any other ETFs short today. In the interim, we will manage our open positions in SMH and BBH.

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:

    PPH long (re-entry from June 27) –
    bought 73.55, sold 72.58, points = (0.97), net P/L = ($99)

Open Positions:

    BBH long (from June 16) –
    bought 167.95, new stop 166.70, target (new highs, will trail stop), unrealized points = + 2.10, unrealized P/L = + $210

    SMH long (from June 1) –
    bought 34.82, stop 32.40, target 44.90, unrealized points = (0.27), unrealized P/L = ($81)


Due to the large opening gap down in the futures today, remember to use the MTG Opening Gap Rules to manage the stops on both BBH and SMH. Also, note the new stop in BBH. PPH was stopped out yesterday.

Edited by Deron Wagner,
MTG Founder and
Head Trader