The Wagner Daily


The broad market followed through on last Thursday’s bullish reversal day, as each of the major indices logged impressive gains on Friday. After opening near unchanged levels, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average trended steadily higher throughout the day and closed higher by 1.2%, 1.8%, and 1.4% respectively. Like the previous day, each of the major indices again closed at their intraday highs. As we had anticipated, last Thursday morning’s opening gap down and subsequent intraday reversal seems to have provided the “wash-out” that was necessary in order for the broad market to move higher out of its six-week sideways range. The major indices’ gains for the week were: Nasdaq Composite + 2.7%, S&P 500 + 1.5%, and the Dow Jones Industrials + 1.4%. The S&P 400 Mid-Cap Index tacked on another 1.9%, while the Russell 2000 surged 3.0% higher.

Last Friday’s gains were broad-based, but many sectors in the Nasdaq showed major relative strength. The AMEX Biotech Index ($BTK) zoomed 2.9% higher and closed at a new 3 1/2 year high. Most tech-related sectors also showed relative strength. Both the Networking ($NWX) and Computer Hardware ($HWI) sectors gained 2.7%, while the Philly Semiconductor Index ($SOX) moved 2.5% higher. On the downside, both Oil ($XOI) and Oil Services ($OSX) took a break from their recent gains, but closed only marginally lower. Friday’s strength in the Biotechs pushed our long position in BBH, which we entered on June 16, to an unrealized gain of 9.55 points. The $SOX strength also enabled our long position in SMH to close at a new 52-week high.

Mixed total volume in the markets was the one element of last Friday’s session that was a bit disappointing. Turnover in the Nasdaq increased by 4%, but total volume in the NYSE came in 2% lighter than the previous day’s level. Given the large percentage gains in the S&P and Dow, it would have been better to see a corresponding rise in market volume. Volume in both exchanges was nearly equal to their 50-day average levels, which is not too bad considering we are in the middle of the annual “summer doldrums.” Despite somewhat light volume levels, market internals were very strong. Advancing volume in the Nasdaq exceeded declining volume by a whopping margin of 6 to 1. The NYSE ratio was positive by 4 to 1.

On a technical basis, Friday’s action was quite significant because several sectors and indices broke out above key resistance levels. Perhaps the most important of these breakouts was the Nasdaq Composite, which finally closed above resistance of the 2,100 level. As the chart below illustrates, the 2,100 level acted like a brick wall on numerous breakout attempts last month. Notice also how the 20, 50, and 200-day moving averages will now act as support:

Interestingly, last week’s closing price of 2,112 was the highest close in the Nasdaq since January 3, the day the current year’s Nasdaq price correction began. This means the Nasdaq is now poised to retest its prior 52-week high, as there are only a few days of price resistance between Friday’s close of 2,112 and the December 30 closing high of 2,178. The longer-term weekly chart of the Nasdaq below illustrates this:

The breakout in the Nasdaq was much cleaner than in the S&P 500, which still must contend with its prior highs from last month. Be careful with the band of resistance on the S&P between 1,212 and 1,220, which is just above last week’s closing price of 1,211:

Even though the S&P may pause as it tests its overhead resistance band, the positive is that strength in the Nasdaq should help to pull it along. The S&P 500 is now back above its 20, 50, and 200-day moving averages, which should also act as new support. Of more concern than the S&P is the Dow Jones, which has been showing relative weakness for the past several months.

The Dow has kept pace with the other major indices during the recovery of the past two days, but there is still a lot of overhead supply on the Dow. The Dow’s close of 10,449 put the index one point above its 200-day MA and a few points above its 20-day MA. Obviously, it is important that the index holds above those key moving averages, but resistance of the prior highs will probably take a bit of time to overcome:

In summary, last Friday’s breakout was important because it pushed the Nasdaq into range of testing its prior 52-week high, but both the S&P and Dow may have a bumpy ride as they attempt to follow suit and move higher. Therefore, as we have been saying for the past month, consider focusing on long positions in the Nasdaq instead of the S&P and Dow. We remain perfectly positioned in two of the strongest industry sector ETFs right now: BBH and SMH. Also be aware that quarterly corporate earnings season kicks into gear this week, with Apple, Sun Micro, and GE among the high profile companies reporting this week.

Today’s Watchlist:

There are no new trade setups for today, but we remain long both BBH and SMH.

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:

    BBH long (from June 16) –
    bought 167.95, new stops; HALF at 171.80, HALF at 169.80, target (new highs, will trail stop), unrealized points = + 9.55, unrealized P/L = + $955

    SMH long (from June 1) –
    bought 34.82, new stop 33.40, target 44.90, unrealized points = + 0.71, unrealized P/L = + $213


Note that we have trailed the stops higher in both BBH and SMH above.

Edited by Deron Wagner,
MTG Founder and
Head Trader