The Wagner Daily


After a choppy, range-bound session of lighter overall volume, the major indices closed with mixed results yesterday. Both the S&P 500 and Nasdaq Composite traded in narrow ranges, inside the previous day, and closed higher by 0.1% and 0.5% respectively. But the Dow Jones Industrial Average showed relative weakness and fell 0.2%. Yesterday’s 0.4% gain in the Russell 2000 Small Cap Index was largely responsible for the strength of the Nasdaq, but the S&P 400 Mid-Cap Index gained only 0.1%. The AMEX Biotech Index ($BTK) resumed its solid uptrend with another 1.1% gain, which also pushed BBH (Biotech HOLDR) over the $195 level and to nearly a 5-year closing high. The Semiconductor Index ($SOX) was flat, but that enabled SMH (Semiconductor HOLDR) to continue its bullish, narrow-range consolidation at the highs.

As we often see during choppy and indecisive trading sessions, volume was low in both exchanges. Total volume in the NYSE market declined by 5%, while volume in the Nasdaq came in 7% lighter than the previous day. Turnover in both exchanges came in below average levels, which is common during the “summer doldrums.” Note that volume in the Nasdaq has declined in three of the last four days, but the index closed higher on the sole day of increased volume, and also gained ground in two other sessions. The one “down” day of the last four was on declining volume. Similarly, the S&P has closed higher in three of the last four sessions, but with two of the “up” days occurring on higher volume. Again, the cingular day of losses was on lighter volume. This detailed analysis tells we have not yet seen any warning signs of institutional selling activity, which would be marked by higher volume “down” days and lighter volume “up” days. Overall, volume is drying up as the market continues to consolidate in a range, which is typically bullish.

If you have been holding SMH since our initial entry was suggested back on June 1, you’re sitting on a 7% gain, but you may be getting a bit bored with the lack of action during the past two weeks. If so, it is important to realize that the “boring” sideways action in SMH is actually quite bullish. Remember that even the strongest stocks need to pause and catch their breath along the way, and this occurs in one of two ways. The most common scenario is to have a price retracement or “pullback” in the stock price. When this occurs, it usually enables the price of the stock or ETF to drop down to support of a key moving average or uptrend line, which in turn provides the necessary lift for the stock to stage its next leg up. However, the other manner in which a stock or ETF takes a rest is through a “correction by time.” This occurs when the issue trades near its recent highs in a narrow, sideways range, which gives the moving averages and uptrend lines a chance to rise up to meet the price of the stock or ETF. Between the two scenarios, a “correction by time” is more bullish because it indicates that the bulls are not interested in selling and taking their profits into price strength. Instead, sideways price action merely indicates a temporary lack of buying interest. As such, it only takes the slightest increase in buying pressure to push the issue to new highs. As the daily chart below illustrates, this is what is occurring in SMH right now:

Notice how the 20-day moving average, circled above, has been rising steadily during the past two weeks while SMH has been trading sideways in a narrow range. If this continues, the 20-day MA will soon meet the price of SMH, which should subsequently push it to new highs. If and when that occurs, we will be looking to sell half of our long position into strength near our first price target of $38.85. We will then raise the stop to maximize profit on the remaining shares.

As for the broad-based indices and ETFs, yesterday’s action did little to change the short-term support and resistance levels we have pointed out recently. Continue to watch the same levels we outlined in yesterday’s Wagner Daily, but more importantly, watch for a sharp increase in volume. As volume has been declining for the past several days, we are likely to see a volume spike within the next day or two. Of importance is the direction the market goes when institutions step in and spur the increase in turnover. This will provide us with the true intentions of the “big boys” in the short-term. In the intermediate-term, the weekly charts look pretty solid (except for the Dow), but a short-term correction would not be out of line.

Today’s Watchlist:

EWA – iShares Australia Index

Trigger = above 18.35 (above high of weekly consolidation)
Target = new highs (will trail stop)
Stop = 17.75 (below low of last week’s consolidation)
Shares = 800

Notes = We listed this setup in yesterday’s Wagner Daily, but it did not trigger. Since we still like the setup, we are watching it for potential entry again today.

Just as we recently entered FXI (iShares China) on a breakout to a new high, we are looking to do the same with the ETF that tracks the Australian markets. The pattern on the weekly chart above is very bullish and we anticipate that EWA will break out to a new high in the coming week.


Beginning August 1, the Wagner Daily position model was modified for improved simplicity to traders who follow the portfolio. Instead of the former model that assigned each ETF a predetermined share size, the new model is simply based on a max. loss of $500 per trade. The size of the model account is also being increased to a cash value of $50,000, which means that each trade is limited to a maximum risk of 1% of equity. The share size listed in each trade corresponds to a maximum loss of $500 or less if the trade were to hit the predetermined stop price. More details about the new position model will follow via separate e-mail announcement in the coming week.

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:


Open Positions:

    FXI long (HALF position, from July 14) –
    bought 57.95, new stop 62.10, target (new highs, trailing stop), unrealized points = + 4.53, unrealized P/L = + $680

    SMH long (from June 1) –
    bought 34.82, stop 35.70, first target 38.85, then 44.90, unrealized points = + 2.43, unrealized P/L = + $729


Per intraday e-mail alert, we raised the stop on the remaining shares of FXI.

Edited by Deron Wagner,
MTG Founder and
Head Trader