Commentary:

Like the previous day, the major indices began the day with an opening gap up, but this time the gains remained intact. The broad market traded in a narrow, sideways range throughout the first half of the day, then exhibited the usual post-Fed volatility and indecision after the announcement of a (widely expected) quarter-point increase in the Federal Funds rate. Buying in the Pharmaceutical stocks enabled the Dow Jones Industrial Average to exhibit rare relative strength and gain 0.7% yesterday. The S&P 500 also moved 0.7% higher, while the Nasdaq Composite recovered 0.5% of its recent losses. Many small and mid-cap stocks showed relative weakness, as they continued to correct from their recent record high prices. The S&P 400 bounced 0.4%, but the Russell 2000 managed only a 0.1% gain.

After three straight days of declining volume, yesterday saw an uptick in turnover. Total volume in the NYSE increased by 16%, while volume in the Nasdaq came in 1% higher than the previous day’s level. Internals were bullish, as advancing volume in the NYSE exceeded declining volume by a margin of 2.2 to 1. The Nasdaq internals were positive by a similar margin. Although the percentage increases in yesterday’s volume levels were relatively small, it was technically a bullish “accumulation day” nevertheless. The S&P 500 and Dow Jones have closed lower in three of the past five sessions, but both of the “up” days were on higher volume, while the three “down” days were on declining volume. Higher volume on a majority of the “up” days and lighter volume on the “down” days is exactly what you should see in a healthy market, regardless of normal price corrections along the way.

Yesterday’s industry sector performance was mixed, as none of the major sectors we follow closed higher or lower by more than 1.3%. As expected, relative strength in the Semiconductor Index ($SOX) enabled the sector to easily gain 1.2%, despite only a 0.5% gain in the Nasdaq Composite. Both the Retail ($RLX) and Home Construction ($DJUSHB) indexes also bounced about 1% yesterday, but this was to be expected considering that $RLX dropped 4% and $DJUSHB plummeted 10% throughout the prior four days. Because their retracements were minor and on light volume, we continue to expect lower prices on both sectors in the short-term.

The DJ Utilities Average ($DJU) similarly gained 1.1% yesterday, but remains below resistance of its prior intermediate-term uptrend line that was broken the previous day. We like the idea of shorting XLU or UTH into yesterday’s bounce, but such a trade would need to have a short-term time horizon because both ETFs have support of their long-term, monthly uptrend lines just below current levels. The longer a trendline has been intact, the more significant the trend becomes. Therefore, an uptrend that has been in place for several years is more powerful than a trend that has only been in place for a few months. The first graphic below shows a break of trendline support on the daily chart of XLU (S&P Utilities SPDR), but the longer-term monthly chart below it shows the primary trend is still intact:

When two charts of the same stock present conflicting signals on different time frames, remember that the longer-term chart is always more powerful. This, of course, does not mean you could not profit from a short in XLU at this time, but it simply means you would need to keep a tight stop and be quick about taking profits due to support of the multi-year uptrend line just below. A safer way to play this would be to wait for a potential break of the monthly uptrend line, then short the first subsequent bounce into that trendline. We will be stalking XLU over the next few weeks for the opportunity to do so.

Taking an updated look at the major indices, it’s positive to see that the S&P 500 has held above support of its prior high at the 1,220 level. However, the index closed yesterday just below resistance of its 20-day moving average at the 1,232 level. As long as the S&P holds above that 1,220 support level, the daily chart remains healthy, but a break below that level will cause a test of the 50-day moving average at 1,214. The next several days will likely determine the direction of the S&P throughout the remainder of the month. A rally back up to last week’s highs would set a bullish tone, but a break down to the 50-day moving average would create enough overhead supply to cause choppy conditions through month-end. The blue horizontal line on the daily chart below illustrates the short-term support level. We have also circled the resistance levels as well:

The Nasdaq Composite daily chart looks even better, as the index is (thus far) holding well above its 50-day moving average and daily uptrend lines. A sideways consolidation seems more likely than a significant retracement in the Nasdaq, but a rally back above the 2,190 level could easily negate any further correction at all. As for the Dow Jones, it continues to be a choppy, sloppy mess that is stuck in the middle of a multi-month range and its 20 and 50-day moving averages. We continue to advise against trading DIA unless you are only daytrading it.

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Today’s Watchlist:

GLD – StreetTRACKS Gold Trust
Long

Trigger = above 43.58 (above yesterday’s high and hourly downtrend line)
Target = 45.95 (resistance of the December 2004 high)
Stop = 42.55 (below 20 and 50-day MAs)
Shares = 800

Notes = GLD did not trigger yet, but we are still targeting it for entry today. Note the new trigger price above. 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.

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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):
(none)

Open positions (coming into today):

SMH long (150 shares (half of original position) from June 1) –
bought 34.82, stop 35.70, first target 38.85, then 44.90, unrealized points = + 2.22, unrealized P/L = + $333

EWA long (800 shares from Aug. 3) –
bought 18.36, stop 17.75, target of new highs (will trail stop), unrealized points = + 0.10, unrealized P/L = + $80

RTH short (400 shares from Aug. 5) –
shorted 100.20, stop 102.25, target 96.40, unrealized points = (0.28), unrealized P/L = ($112)

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

$60,516

Notes:


No changes to stops on open positions. GLD setup still live for potential trigger today.

Click
here 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