Commentary:

After opening the day marginally higher, the major indices spent the first two hours of the day trending higher, then consolidated and traded sideways throughout the remainder of the day. The Nasdaq Composite continued to build on last week’s breakout by tacking on another 1.1% gain. Both the S&P 500 and Dow Jones Industrials continued to keep pace as well and closed higher by 0.6% and 0.7% respectively. The Russell 2000 Small Cap Index surged another 1.4%, while the S&P 400 Mid-Cap Index cruised another 0.8% higher. Both indices also closed at record highs for the second consecutive day.

Like the previous day, yesterday’s strength was broad-based because every major industry sector we monitor closed in the green. In the S&P, the Dow Jones Home Construction Index ($DJUSHB) gained 2.4% and closed at an all-time high, while Oil Service ($OSX) and Utilities ($DJU) showed resilience by gaining 1.2% and 1.0% respectively. Healthcare ($HCX) and Pharmaceutical ($DRG) were laggards, although both indices managed small gains. In the Nasdaq, most tech-related sectors showed solid performances. The Internet Index ($GIN) gained 2.4%, both the Disk Drive Index ($DDX) and the Semiconductor Index ($SOX) moved 2.0% higher, and the Computer Networking Index ($NWX) gained 1.4%. The AMEX Biotech Index ($BTK) only gained 0.2%, but that’s not surprising given that the index has rallied more than 6% within the past four days.

Unfortunately, overall volume yesterday was a mixed picture. The positive is that total volume in the Nasdaq was 6% higher than the previous day’s level, but volume in the NYSE once again declined, this time by 4%. The last three “up” days in the Nasdaq have each occurred on higher volume, meaning each of the past three days have been bullish “accumulation days” in the Nasdaq. Both the S&P and Dow have also closed higher during the past three days, but only one of those “up” days was on higher volume. This means the Nasdaq has been seeing more institutional buying than the S&P and Dow sectors, which is confirmed by the clear breakout in the charts of the Nasdaq as well. As we mentioned yesterday, you are better off sticking with long positions in the Nasdaq because the index has less overhead resistance and is also seeing higher volume on the “up” days. Nevertheless, internals remained firmly positive yesterday in both the Nasdaq and NYSE. Advancing volume in the Nasdaq exceed declining volume by a ratio of 4.9 to 1, while the NYSE’s ratio was positive by 3.6 to 1.

The most notable consequence of yesterday’s action was that the $SOX finally broke out and closed at a new 52-week high. SMH (Semiconductor HOLDR) did the same last Friday. The breakout was quite impressive because it pushed the $SOX above a double top that had formed with the highs of December 2004 and February/March 2005. The weekly chart of the $SOX below illustrates the breakout to a new 52-week high:

We initially bought SMH on June 1 after it (along with the $SOX) broke out of a 4-year downtrend line and moved back above its 200-week MA. In hindsight, we were perhaps a bit early on the entry because we were required to sit through a correction, but we clearly explained we were taking an intermediate-term view when we first entered the trade. When an ETF breaks out of a multi-year downtrend on a weekly chart, it provides an excellent long entry, but only if you are willing to hold through a correction back down to its prior downtrend line. When looking at a weekly chart, always remember that each candlestick represents an entire week of price action. Big price targets and large gains require patience, and our patience in holding the SMH position has begun to pay off (as well as with BBH).

As for the broad market, the S&P 500 set a new 4-month closing high yesterday and is now less than six points away from its prior 52-week closing high. However, despite closing at a 4-month high, the index has not yet confirmed a clear breakout of its prior intraday highs from June. The red horizontal line on the chart below illustrates how the S&P closed right at this horizontal price resistance. The next resistance level at 1,225 (the 52-week closing high) is also circled on the chart:

Yesterday’s gain pushed the Nasdaq Composite to within only 2% of its prior 52-week closing high that was set on December 30. Given the minimum amount of overhead supply at current levels, we now expect the Nasdaq to test resistance of its 52-week high within the next one to two weeks. There is a small band of horizontal price resistance around the 2,162 level, but the prior high of 2,178 is a more significant price to watch. On the downside, prior resistance of the 2,100 level should now act as the new support on any correction in the Nasdaq.

There continues to be an abundance of overhead supply on the Dow Jones all the way up to its prior closing high of June (10,623). It was positive that the Dow pushed so easily back above its 200-day MA yesterday, but now the index is in the middle of its prior trading range. We refer to this as “no-man’s land” because the Dow could easily go in either direction from here. Therefore, we continue to recommend avoiding long positions in DIA (Dow Jones Tracking Stock), although we cannot recommend shorting it right now either.

Remember that earnings season is upon us, so please be aware of potential earnings reports before entering new positions.

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Today’s Watchlist:

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

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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. Net P/L figures are based on the quantity of shares represented
in the MTG
Position Sizing Model.

Closed Positions:

(none)

Open Positions:

BBH long (from June 16) –
bought 167.95, split stops: HALF at 171.80, HALF at 169.80, target (new highs, will trail stop), unrealized points = + 9.43, unrealized P/L = + $943

SMH long (from June 1) –
bought 34.82, new stop 34.10, target 44.90, unrealized points = + 1.58, unrealized P/L = + $474

Notes:

Note the new stop we have trailed higher on SMH.

Edited by Deron Wagner,
MTG Founder and
Head Trader