The Wagner Daily


The major indices wrapped up a choppy and indeterminate week with a day of broad-based losses last Friday. A negative earnings report from Dell Computer caused the Nasdaq to gap down 0.7% and drift lower to a 1.3% loss at mid-day, but the index recovered in the afternoon and finished the session near its intraday high and with a 0.8% loss. The S&P 500 showed more relative strength than the Nasdaq in the morning, but the index closed 0.6% lower and in the bottom third of the day’s range. The Dow Jones Industrial Average followed a similar pattern and posted a 0.8% loss. Small caps continued their correction that began two weeks ago, as the Russell 2000 Index shed 1.0%. The S&P 400 Mid-Cap Index, however, held up well and lost only 0.2%.

Total volume in the NYSE declined by 8%, which prevented the S&P and Dow from registering a “distribution day.” But turnover in the Nasdaq conversely rose 4% higher than the previous day’s level. The increase in volume, combined with its 0.8% loss, gave the Nasdaq its second “distribution day” within the past week. Internals were also bearish, as the Nasdaq’s declining volume exceeded advancing volume by a margin of 2.5 to 1. The NYSE was similarly negative with a 2.3 to 1 ratio. Prior to August 10, most of the Nasdaq’s “up” days were occurring on higher volume, while all but one “down” day in the prior four weeks were on lighter volume. Such action indicated a healthy market, but the picture began to change last Wednesday. The last three sessions have consisted of two days of higher volume selling (“distribution”) and one “up” day that occurred on lighter volume. This recent change to a negative price to volume relationship in the Nasdaq serves as a caution sign to astute traders who understand that volume is one indicator that never lies.

Since closing the month of July at a fresh 4-year high, the Nasdaq has had two straight weeks of losses, but the positive is that the index has come into support of its weekly uptrend line. The chart of the Nasdaq below shows how the index finished last week just above the lower channel support of its uptrend (the ascending blue line) that has been in place since the low of April:

Because the above uptrend line has been in place for the past three and a half months, we must assume the uptrend will remain intact until the Nasdaq proves otherwise. As such, it seems likely the Nasdaq will bounce off support of its uptrend line in the coming week. But even if the index breaks its uptrend line, support of the 50-day moving average is just below (at the 2,123 level). The Semiconductor Index ($SOX) has also shown great relative strength during the broad market’s recent correction and should be among the first sectors to rally when the Nasdaq does. We closed the rest of our long position in SMH (Semiconductor HOLDR) for a 7% profit when it broke short-term support on August 4, but we are looking for a possible re-entry point in the coming week. As you can see on the chart below, the 50-day moving average has converged with the daily uptrend line of SMH. This convergence should provide strong support to enable a continuation of the current uptrend:

While the Nasdaq and $SOX charts look bullish in the short-term, the daily charts of both the S&P 500 and Dow Jones show a lot of recent indecision. Despite gains of 0.3% in both indices last week, it was a major “chop fest” in the S&P and Dow. Notice the wild swings in both directions on the hourly chart of the S&P below:

As long as the erratic and choppy action continues in the S&P and Dow, we would advise against trading SPY or DIA. Be careful because it is easy to overtrade a sideways, range-bound market. As beginning traders quickly learn, doing so is never a good idea! Going into the new week, we are taking a neutral stance on the broad market’s short-term direction. Our focus is therefore on managing existing positions for maximum profitability rather than aggressively entering new positions. Patient and disciplined traders are always rewarded in the long-term, so take it easy until the market gives us clear signals of its next direction.

Today’s Watchlist:

There are no new “official” trade setups today, as we are near our maximum buying power based on the model account size. However, GLD continues to looks good on the long side, and SMH may be setting up for a buy as well.

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):

      EWA long (800 shares from Aug. 3) –
      bought 18.36, new stop 18.35, target of new highs (will trail stop), unrealized points = + 0.57, unrealized P/L = + $456

      UTH short (300 shares from Aug. 10) –
      shorted 113.13, stop 115.30, target 107.80, unrealized points = + 0.27, unrealized P/L = + $81

      RTH short (400 shares from Aug. 5) –
      shorted 100.20, stop 102.25, target 96.40, unrealized points = (0.15), unrealized P/L = ($60)

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



      We raised the stop on 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