Commentary:

Relative strength in the Semiconductor Index ($SOX), which rocketed 2.5% higher yesterday, sparked a higher volume rally that led the Nasdaq Composite to a 1.0% gain and a fresh four-year high. Both the S&P 500 and Dow Jones Industrial Average followed suit, closing higher by 0.7% and 0.6% respectively. Utilities ($DJU), which zoomed 2.5% higher, and Oil Service ($OSX), which gained 2.2%, were among the strongest sectors in the S&P. The S&P 400 Mid-Cap Index and the Russell 2000 Small-Cap Index also kept pace with the major indices, as both indices once again closed at new record highs. Each of the indices closed near their intraday highs, which bodes well for potential upside follow-through in today’s morning session.

Perhaps the biggest positive of yesterday’s market action is that volume in both exchanges came in higher than the previous day and above average levels. Total volume in the NYSE surged 15% higher, while turnover in the Nasdaq increased by 18%. Internals were equally bullish, as advancing volume exceeded declining volume by a ratio of 2.5 to 1 in the Nasdaq and 2.1 to 1 in the NYSE. Most important of the internals is that volume in both the NYSE and Nasdaq exceeded their 50-day average levels. This was a welcome reprieve from the light volume in the Nasdaq throughout the past week.

The fact that yesterday’s gains were broad-based throughout many sectors, combined with higher overall volume levels, tells us that institutions such as mutual funds were behind yesterday’s rally. The reason we pay so much attention to analyzing broad market volume levels is that institutional trading activity accounts for approximately 80% of the market’s volume on a daily basis. Rallies cannot be sustained for long periods of time without institutional backing, and a daily analysis of overall volume levels tells us whether or not institutions are at work behind the scenes.

One of the reasons we discuss the $SOX index so frequently is because the semiconductor stocks are so heavily weighted within the Nasdaq. As such, the $SOX usually leads the Nasdaq, which in turn sets the pace of the other major indices on most days. Rarely will the Nasdaq rally sharply without the $SOX leading the way. As anticipated and discussed in yesterday’s Wagner Daily, the Semiconductor HOLDR (SMH) broke out above its bullish consolidation of the past two weeks and set a new 52-week high yesterday. This, of course, is bullish for the overall broad market. The daily chart below shows the breakout that resulted in a 2.1% gain in SMH:

Remember that prior resistance levels become the new support levels after the resistance is broken. Therefore, the prior resistance of SMH (the upper channel marked by the red line above) should now act as support on any price retracement in SMH. Because of this, we are now raising our stop on SMH to just below yesterday’s low, as a violation of that low would be negative. We plan to sell half of the SMH long position into strength as it nears our first price target. We have also tightened the stop in FXI to protect our 5.8 point gain (see position recap below if you are a subscriber).

Although the Nasdaq Composite broke out to a new high yesterday, both the S&P 500 and Dow Jones Industrial Average remain within the channels of their sideways trading ranges. The S&P 500 technically closed half a point above last week’s closing high, but is still below the intraday high of last week. The intraday high of last week is 1,245.15 in the S&P (124.64 for SPY). Needless to say, those levels should be watched closely as pivotal areas of resistance in the S&P and SPY going into today’s session. The resistance is marked by the red horizontal line on the chart of the S&P 500 below. First support in the S&P is marked by the blue uptrend line, followed by the 20-day moving average below that:

In the laggard Dow Jones, resistance is found in the range of 10,700 to 10,717 (last week’s high). Divide those numbers by 100 to know the corresponding resistance in DIA.

For the best odds of success in the short-term, stick to ETFs and stocks that are Nasdaq-related, such as SMH, BBH, or QQQQ. The “old economy” sector and broad-based ETFs such as PPH, RTH, or DIA should be restricted to ultra short-term momentum trading. The technical patterns of most of them are not as clear as the breakouts in SMH and BBH.

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Today’s Watchlist:

EWA – iShares Australia Index
Long

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 continue stalking EWA for long entry, as it has not yet triggered, but is still a nice setup.

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.

IMPORTANT NOTE TO SUBSCRIBERS – PLEASE READ:

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.

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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:

FXI long (HALF position, from July 14) –
bought 57.95, new stop 63.30, target (new highs, trailing stop), unrealized points = + 5.85, unrealized P/L = + $877

SMH long (from June 1) –
bought 34.82, new split stop: HALF at 37.70, HALF at 35.70, first target 38.85, then 44.90, unrealized points = + 3.48, unrealized P/L = + $1,044

Notes:

Per intraday e-mail alert, we raised the stops on both FXI and SMH. Note that we plan to sell HALF of the SMH position into strength if it nears the first target of $38.85. A negative earnings report from ADI after yesterday’s close may result in a gap down of SMH today, but remember to use the MTG Opening Gap Rules to manage the position if it gaps down below our stop.

Edited by Deron Wagner,
MTG Founder and
Head Trader