The Wagner Daily


The major indices followed up last Thursday’s broad-based losses with another day of selling last Friday, but volume once again declined across the board. After beginning the day with an opening gap down, the broad market trended lower throughout the morning session, but found minor support and traded in a narrow, sideways range throughout the afternoon. The S&P 500 Index lost 0.8%, the Nasdaq Composite dropped 0.6%, and the Dow Jones Industrial Average closed 0.5% lower. Each of the major indices again closed near their intraday lows, indicating that institutions had no buying interest ahead of the weekend. The S&P 400 Mid-Cap Index and Russell 2000 Small-Cap Index, both former market leaders, slid 1.1% and 1.3% respectively. Both indices broke their five-week winning streaks, but remain within 3% of their all-time highs.

Despite bearish market internals in which declining volume exceeded advancing volume by nearly 4 to 1, total volume in the NYSE came in less than 1% lower than the previous day. Turnover in the Nasdaq was 7% lighter. It is important to note that each of the major indices sustained moderate losses during the past two days, but total market volume declined both days. Whereas “distribution days” of higher volume selling typically indicate institutional selling, it is interesting that mutual funds and other big players showed no signs of rushing for the exit doors towards the end of last week. The pattern of higher volume on most of the “up” days and lower volume on the “down” days remains intact, despite a price correction of 1.5% in the S&P 500 during the past two days. As such, it is likely that the broad market’s retracement will be a short-term correction rather than a major market top. However, a string of “down” days on higher volume could quickly change the technical picture.

During the last two days, the biggest losses have come from sectors that were formerly high-flying market leaders. Thursday saw a 2.1% drop in the Retail Index ($RLX), while the Dow Jones Home Construction Index ($DJUSHB) sustained a 4.5% haircut in Friday’s session. Such sector rotation typically presents near-term short selling opportunities within the sector-specific ETFs, although you need to be a bit quicker at taking profits when trading against the bigger picture of a primary uptrend. As detailed to monthly subscribers in last Friday’s “watchlist,” we entered a new short position in RTH (Retail HOLDR) when it broke its three-month uptrend line. The daily chart of RTH below illustrates the break of trendline support. Our price target on the short side is the 200-day moving average (the orange line):

Many Home Builder stocks are also breaking their primary uptrend lines and now present a similar short selling opportunity. There is not an ETF that specifically tracks that sector. As such, ETF traders may consider building their own “synthetic ETF” by simultaneously shorting a basket of the Home Builder stocks such as TOL, HOV, KBH, BZH, RYL, or others. This is the same thing we suggested when discussing the breakout in the Gold and Silver Index ($XAU) in the August 4 issue of The Wagner Daily.

Friday’s losses caused the S&P 500 Index to close below its 20-day moving average for the first time since July 7, but the index is still above support of both its prior weekly highs and the 50-day moving average. The weekly chart of the S&P 500 below shows how last week’s 0.6% correction caused the index to close just above horizontal price support of its prior highs near the 1,220 level:

Although not illustrated above, support of the 50-day moving average is at 1,213, only seven points below the prior highs of the 1,220 level. Because we expect the S&P 500 to find key support at its prior weekly highs and the 50-day MA, we are not comfortable with shorting SPY or other broad-based ETFs right now. However, a low-risk shorting opportunity would present itself if the index bounces off support between 1,213 to 1,220, but subsequently sets a “lower high” on the daily chart. If this occurs, new overhead resistance of the 20-day moving average could provide an ideal entry point on the short side. But most importantly, remember that we have yet to see any signs of institutional selling during this recent correction, so shorting the broad market prematurely is risky.

Unlike the S&P, the Nasdaq Composite remains above support of its 20-day moving average, albeit only by two points. The daily chart of the Nasdaq still looks quite bullish and shows the index well above support of its primary uptrend line, but the weekly chart is showing the possible formation of a “double top” from its prior high of last December. The chart below illustrates this problematic area of the 2,190 resistance level, which the Nasdaq closed above for only a few days before dropping back below it:

It is certainly too early to accurately call it a “double top,” but it is good to be aware of that resistance level so that you can be cautious with entering new Nasdaq-related positions. The Semiconductor Index ($SOX) is showing great relative strength, which is likely to hold the Nasdaq up, but the Biotech Index ($BTK) appears to be entering a short-term correction. The best strategy for any Nasdaq-related ETFs or stocks is to focus on managing your existing positions with tight trailing stops, and waiting for the broad market to show its hand in the short-term before aggressively entering new long positions on such a small pullback. A few industry sectors such as Retail and Home Building may present shorting opportunities in the near-term, but stick to specific industry sectors instead of attempting to short the broad-based ETFs here.

Today’s Watchlist:

GLD – StreetTRACKS Gold Trust

Trigger = above 43.88 (above last week’s high)
Target = 45.95 (resistance of the December 2004 high)
Stop = 42.75 (below 10-day MA)
Shares = 800

Notes = Per our analysis in the August 4 issue of The Wagner Daily, the Gold and Silver index ($XAU) is now looking good on the weekly chart and we anticipate further upside. Although GLD does not necessarily move in lockstep with the $XAU index, it is now about to break out above its weekly downtrend as well. A breakout above last week’s high would break the downtrend that has been in place for eight months.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of trades that were closed since the last newsletter, as well as an update on all open positions from The
Wagner Daily
. Net P/L figures are based on the $50,000 Wagner Daily model account size.

    Closed positions (since last report):


    Open positions (coming into today):

      SMH long (150 shares (half position) from June 1) –
      bought 34.82, stop 35.70, first target 38.85, then 44.90, unrealized points = + 2.08, unrealized P/L = + $312

      RTH short (400 shares from Aug. 5) –
      shorted 100.20, stop 102.25, target 96.40, unrealized points = + 0.50, unrealized P/L = + $200

      EWA long (800 shares from Aug. 3) –
      bought 18.36, stop 17.75, target of new highs (will trail stop), unrealized points = (0.09), unrealized P/L = ($72)

    Current equity exposure ($100,000 max. buying power):



      RTH triggered for short entry last Friday. There are no changes to the stops on SMH and EWA.

      for glossary and explanation of terms used in The Wagner Daily

      Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader