The Wagner Daily


After beginning the day with an opening gap higher, the broad market drifted lower in the morning session, but stocks reversed at mid-day and trended higher throughout the afternoon. Like the previous day, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each moved higher in sync with one another and registered the same percentage gains of 0.6%. The percentage gains were similar to the prior day’s 0.5% gain across the board, but with one notable exception — yesterday’s rally pushed both the S&P and Nasdaq firmly above their trading ranges and to new price highs not seen since the middle of 2001. The S&P 400 Mid-Cap Index cruised 0.9% higher and the Russell 2000 Small Cap Index jumped another 1.2% higher. Both the small and mid-cap indices once again closed at new record highs.

Confirming yesterday’s breakout in the S&P and Dow was a 7% increase in NYSE volume. Total volume in the Nasdaq, however, was 4% lower than the previous day’s level. The bullish price action in the broad market would have been better if it was confirmed by higher volume across the board. But remember that the previous session was an “accumulation day” in the Nasdaq and not the NYSE. Yesterday’s increase in volume allowed the S&P and Dow to register an “accumulation day” as well.

The Nasdaq Composite’s 0.6% gain enabled the index to close above its prior intraday high from July 21, as well as the intraday high of January 3 that stopped last week’s rally attempt. The same is true of the S&P 500 in that the index cleared its prior intraday high of July 25. This means there is technically no more overhead supply to hold either the S&P or Nasdaq down because both indices are sitting at new 4-year highs. Resistance from the first half of 2001 and earlier is not very significant because most investors who were trapped that long ago have already sold their positions or are not going to do so. As you may know, stocks and indices that are sitting at multi-year highs usually continue to go higher simply due to the lack of sellers. Even if volume is light on the buy side, it only takes more buyers than sellers to make stocks go higher. As such, holding a long position in SPY with an intermediate-term time horizon is probably wise. Just be sure to keep your stop below the breakout level in case the breakout fails. QQQQ, which tracks the Nasdaq 100 Index, still has not broken out to a new high, so that ETF is best left for short-term momentum trading instead.

It appears that the relatively weak Dow Jones Industrial Average may finally be beginning to play “catch up” with the S&P and Nasdaq. The Dow has lagged behind both the S&P and Nasdaq ever since the broad market put in its year-to-date lows in April. Most down days in the broad market have seen the Dow sustain the largest percentage losses, while the up days have seen the Dow post the smallest percentage gains. However, the Dow has kept pace with the S&P and Nasdaq for the past two days. While it will obviously require more than two days to see if a new trend is developing, the fact that the Dow also broke out above resistance of its trading range is quite significant. Below is a chart of the Dow that illustrates yesterday’s close at a new four-month high:

Unlike the S&P and Nasdaq, the Dow still must contend with overhead supply of its prior highs from the first quarter of 2005. Even with the 1.1% gain of the past two days, the Dow is still more than 2% below its 52-week closing high of 10,962. Furthermore, there is also an area of horizontal price resistance around 10,865. This is represented by the horizontal red line on the weekly chart of the Dow below:

If yesterday’s breakout in the Dow holds firm, there is a good chance the index will soon rally up to test resistance near 10,865. Getting through that may be difficult, especially if the Nasdaq and S&P begin to correct at the same time the Dow reaches that level. Even if the Dow manages to clear the 10,865 level, the 52-week high from March presents an even greater challenge. Therefore, short-term traders may consider buying DIA due to a breakout above its trading range, but don’t get too greedy with an upside price target. Firm stops are in order as well, just in case the Dow breakout fails to hold. As always, remember to trade what you see, not what you think!

Today’s Watchlist:

As mentioned yesterday, we are not looking to enter new ETF positions until earnings season begins to wind down (next week). We do, however, remain long FXI and SMH, both of which are showing large unrealized gains. UTH short stopped out for a small loss yesterday.

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:

    UTH short (from July 20) –
    short 112.67, closed 114.35, points = (1.68), net P/L = ($170)

Open Positions:

    FXI long (from July 14) –
    bought 57.95, new split stop: HALF at 61.10, HALF at 58.50, target (new highs, trailing stop), unrealized points = + 3.62, unrealized P/L = + $1,086

    SMH long (from June 1) –
    bought 34.82, new stop 35.70, first target 38.85, then 44.90, unrealized points = + 2.55, unrealized P/L = + $765


Note the new, split stop on FXI and raised stop on SMH. Also, UTH stopped out yesterday.

Edited by Deron Wagner,
MTG Founder and
Head Trader