The Wagner Daily


A negative earnings report from semiconductor company Analog Devices caused the broad market to open lower yesterday morning, but the major indices recovered to close near unchanged levels. The Nasdaq Composite began the day showing a loss of 0.4%, but the index showed resiliency and grinded its way higher to close with a loss of less than 0.1%. Both the S&P 500 and Dow Jones Industrial Average traded in a similar intraday fashion, but late afternoon strength enabled each index to close in positive territory with matching gains of 0.1%. Small and mid-cap stocks, which have outperformed the major indices for the past several months, showed signs of selling into strength. The Russell 2000 Small Cap Index lost 0.7%, while the S&P 400 Mid-Cap Index gave up 0.3%.

Total market volume in the NYSE increased by 4% yesterday, while volume in the Nasdaq eked out a 2% increase over the previous day’s level. Technically, the 0.1% loss in the Nasdaq combined with the 2% increase in volume made yesterday a bearish “distribution day” in the index, but with such a fractional loss and modest volume increase, the session did not have the feeling of institutional selling. Conversely, the S&P and Dow technically had a bullish “accumulation day,” but it would be misleading to call it that because declining volume nominally exceeded advancing volume levels. Overall, it was simply a quiet day of consolidation, precisely what you want to see following the market’s recent gains.

Nearly every major industry sector closed within one percent of unchanged yesterday, but one notable exception was the Philly Gold and Silver Index ($XAU), which surged 4% higher. We have been stalking the $XAU index (behind the scenes) for the past several weeks, waiting for a breakout above its weekly downtrend line. After consolidating in a narrow, sideways range for the past six weeks, the index finally broke out yesterday. The 4% gain enabled the index to close above resistance of its weekly downtrend line, which had been in place since the high of November 2004. At the same time, the index also broke out and closed above its 200-day moving average. The weekly chart of $XAU below illustrates the break above the 9-month downtrend line. Also notice how the 200-week MA (the orange line) acted perfectly as support:

Taking a look at the shorter-term daily chart, you can see the bullish consolidation and subsequent breakout above the 200-day moving average:

Because both the daily and weekly charts are confirming a breakout in the Gold and Silver Index, we feel the sector now provides some quality trade setups for both short and intermediate-term traders. GLD is the only ETF that is directly related to the $XAU index, but note that GLD mirrors the price of the Spot Gold commodity, whereas the $XAU index consists of individual gold and silver mining stocks. Therefore, buying GLD is not the same as buying individual stocks in the $XAU index. There usually is a price correlation between the price of Spot Gold and the gold mining stocks, but right now it appears that the individual gold and mining stocks are actually breaking out ahead of the price of Spot Gold. As such, you may wish to consider creating your own “synthetic ETF” by buying a small basket of leading stocks within the Gold and Silver Index. A few mining stocks with bullish looking charts are RGLD, GOLD, GG, and ABX.

Yesterday was basically a consolidation day for the major indices, so the short-term support and resistance levels of the major indices haven’t changed. The S&P 500 closed right at last week’s resistance of the 1,245 level, so it would only take a gain of a few points to push the index above those intraday highs. Support should be found near the August 2 low of 1,235, then the 20-day moving average at 1,228. In the Nasdaq Composite, minor price resistance is at the 1,220 level, just three points above yesterday’s closing price. Support is in the range of 2,190 to 2,195. The Dow Jones continues to be a choppy, sloppy mess on the daily chart, so it is best left alone. Nevertheless, the index closed less than twenty points away from a breakout of its three-week range.

Today’s Watchlist:

There are no new plays for today, as EWA long triggered yesterday. We also remain long SMH.


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:

    FXI long (HALF position, from July 14) –
    bought 57.95, sold 63.30, points = + 5.35, net P/L = + $798

Open Positions:

    SMH long (from June 1) –
    bought 34.82, split stop: HALF at 37.70, HALF at 35.70, first target 38.85, then 44.90, unrealized points = + 3.12, unrealized P/L = + $936

    EWA long (800 shares from Aug. 3) –
    bought 18.36, stop 17.75, target of new highs (will trail stop), unrealized points = (0.04), unrealized P/L = ($32)


FXI hit our trailing stop and EWA triggered for new long entry yesterday. We also remain long SMH with the same split stop prices.

Edited by Deron Wagner,
MTG Founder and
Head Trader