Commentary:

Monday’s correction turned out to be short-lived, as both the S&P 500 and Nasdaq Composite cruised to new closing highs of the year yesterday. A positive reaction from IBM’s quarterly earnings results enabled the tech-heavy Nasdaq to gap up and trend upwards to a 1.3% gain. The S&P 500 and Dow Jones Industrials each moved 0.7% higher as well. A 1.6% gain in the Russell 2000 Small-Cap Index erased most of the index’s losses from its recent correction. The S&P 400 Mid-Cap Index zoomed 1.1% higher and set a fresh all-time closing high.

Although most industries closed higher yesterday, the largest gains were in the tech-related sectors. IBM sparked a 1.7% gain in the Computer Hardware Index ($HWI), while the Philadelphia Semiconductor Index ($SOX) posted the same gain and caused our long position in SMH to move 1.9% higher as well. Other leading tech sectors and their gains were: Internets ($GIN) + 2.2%, Software ($GSO) and Networkers ($NWX) + 1.9%, and Disk Drives ($DDX) + 1.3%. Notable “old economy” sectors that showed strength were Oil Service ($OSX), which surged 3.7% higher, and Airlines ($XAL), which soared 1.9%. A positive earnings report from Merrill Lynch also triggered a 1.5% rally in the Broker-Dealer Index ($XBD). Banking ($BKX) and Pharmaceuticals ($DRG) were the only two sectors we track that closed lower.

The broad market followed up Monday’s lower turnover correction with a strong surge higher in market volume yesterday. Total volume in the NYSE rocketed 31% higher, while volume in the Nasdaq similarly increased by 27% over the previous day’s level. Volume in both exchanges also moved back above their 50-day average levels, which is positive considering we are in the lethargic “summer doldrums” period. Yesterday’s increase in total volume combined with the broad-based gains caused both the S&P and Nasdaq to register another “accumulation day,” an earmark of institutional buying activity.

Yesterday’s closing price of 1,229 in the S&P 500 barely exceeded last week’s closing high of 1,227, but nevertheless registered as a new 4-year closing high. Looking at the Nasdaq, yesterday’s 1.3% gain enabled the index to close at a new high for 2005, but it is still 5 points below its prior 52-week closing high of 2,178 (set on December 30). Until the Nasdaq clears that 2,178 level, a bit of caution is warranted in the short-term. Resistance of the prior 52-week high could provide a convenient excuse for profit taking on the long side of the Nasdaq. We have circled resistance of the prior high on the weekly chart below:

Another possible point of contention is in the closely-watched Dow Jones Industrial Average, which appears to be having difficulty breaking out above its prior high from June. Take a look:

Since the rally that began with the July 7 reversal day, both the S&P 500 and Nasdaq Composite have closed higher in eight out of nine sessions. In the S&P, exactly half of those eight “up” days occurred on higher turnover, while the Nasdaq saw five “accumulation days” during the same period. The one losing day was on the lightest volume of the past six weeks. Because the majority of the “up” days are occurring on higher volume, it indicates institutions are accumulating shares — even as both the S&P and Nasdaq sit at their highest levels of the year. Until we begin to see signs of distribution that would occur from higher volume “down” days, your odds of success clearly favor the long side of the market. A negative knee-jerk reaction from closely-watched corporate earnings reports, combined with the Nasdaq and Dow resistance levels illustrated above, could easily trigger a short-term correction at any time, but the major indices are looking bullish in the intermediate-term.

Several key earnings reports after yesterday’s close triggered an abundance of activity in the after-hours session. Intel and Yahoo! both were trading lower after reporting their quarterly earnings after yesterday’s close. Amgen, however, was trading nearly 10% higher after beating forecasts and raising future estimates. As of the time of this writing, the overnight futures market is indicating a lower open for the major indices today, but the mixed reports could make today’s session a bit volatile. As such, use caution entering any new positions today. Check the free Yahoo! Finance earnings calendar to check earnings dates of any other companies.

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Today’s Watchlist:

UTH – Utilities HOLDR
Short

Trigger = below 112.70 (below the 20-MA/hourly)
Target = 108.05 (support of the 50-day MA and 50% Fibo retracement)
Stop = 114.70 (above 61.8% Fibo retracement of correction)

Notes = This setup did not trigger yesterday, but we still like the setup and are keeping it on today’s watchlist. Note the new trigger price. Although UTH is firmly established in a long-term uptrend, it has begun to show signs of a short-term top. Since the high volume selloff on July 14, it has consolidated at its lows, in a narrow range, and will likely break lower. When ETFs and stocks consolidate at their lows, it usually leads to new lows, just as bullish consolidation near the highs usually results in new highs. We are not looking to enter an intermediate-term trade as we did with SMH last month. Rather, we anticipate a quick hit on the short-side with an expected time horizon of only 2 to 7 days. Counter-trend trading must be done quickly and with very disciplined stops.

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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:

SMH long (from June 1) –
bought 34.82, new stop 34.60, first target 38.85, then 44.90, unrealized points = + 2.68, unrealized P/L = + $804

FXI long (from July 14) –
bought 57.95, new stop 56.20, target (new highs, will trail stop), unrealized points = + 0.25, unrealized P/L = + $75

Notes:

We have raised the stops on both SMH and FXI.

Edited by Deron Wagner,
MTG Founder and
Head Trader