Commentary:

Mirroring the previous day’s performance, stocks modestly attempted to rebound at mid-day, but the broad market succumbed to selling in the afternoon. The Dow Jones Industrial Average closed flat, while the S&P 500 Index lost 0.1% and the Nasdaq Composite Index dropped 0.4%. Both the S&P and Nasdaq closed lower by the same percentage they gained the prior day. The S&P 400 Mid-Cap Index lost 0.2% and the Russell 2000 Small-Cap Index shed 0.6%. Every industry sector we regularly follow closed within 1% of unchanged, though a majority of sectors closed in the red. Overall, it was a choppy, narrow-range day that was rather quiet.

As is typical of lethargic, uneventful days, volume declined in both exchanges declined yesterday. Total volume in the NYSE was 4% lower, while volume in the Nasdaq came in 9% lighter than the previous day’s level. Most market internals were bearish. Declining volume in the Nasdaq exceeded advancing volume by a ratio of 2.1 to 1, while the NYSE was negative by 1.8 to 1. As we remain in the “summer doldrums” and many traders are on vacation, turnover in both exchanges once again came in below average. Volume in the Nasdaq has been lighter than its 50-day average level in ten of the past eleven sessions. We don’t expect major increases in volume for the next two weeks, at least until after the Labor Day holiday passes on September 5.

For the second consecutive day, the S&P 500 clung to support of its 50-day moving average, but could not muster up enough strength to bounce off of it. The index also closed in the middle of yesterday’s narrow range, which resulted in a “doji star” candlestick formation being formed at its 50-day moving average. A “doji star” indicates indecision and sometimes precedes a trend reversal. Looking at the chart below, also notice how yesterday’s low in the S&P corresponded with support of its primary uptrend line (the blue line):

Like the S&P 500 Index, the Semiconductor HOLDR (SMH) also closed at support of its primary uptrend line, which has been in place since the low of April 29. It also is holding above its 50-day MA, which is 34 cents below yesterday’s closing price. The blue ascending line on the weekly chart below marks support of the primary uptrend:

Also hovering near a pivotal area of support is the Dow Jones Industrial Average, which has tested support of both its 50 and 200-day moving averages in each of the past three days. The 50-day MA is closely watched by institutions as an indicator of intermediate-term health of an index, but the 200-day MA is even more important because it tells institutions on which side of an index to be positioned in the long-term. Because the financial media so frequently discusses the performance of the Dow, its direction and trend is a powerful “psychological” indicator for the health of the overall broad market. This is so regardless of the fact that the index is comprised of only thirty stocks. Needless to say, watch for a possible break of the three-day low in the Dow, which could trigger rapid selling across the board:

The Nasdaq Composite remains below resistance of its prior uptrend line, which it fell below on August 16, but the index is still six points above support of its 50-day moving average. Any rally attempt in the Nasdaq will be met with resistance of the prior uptrend line near the 2,160 area. However, the 50-day MA is likely to prevent the index from falling much lower, at least in the short-term.

As the charts above illustrate, the broad market is at a pivotal area of support that could result in big moves in either direction. Given the light overall volume in the markets, it’s quite difficult to predict whether the indices will bounce off these key support levels and rally back to their highs, or if they will break support and slide further in the coming weeks. We are currently positioned mostly on the short side of the market, but are prepared to quickly cover our short positions and initiate new long entries if the indices reverse off support. If you’re currently positioned mostly in cash, it is a good idea to have a watchlist of stocks and ETFs you are stalking for potential entry on both sides of the market. For long positions, consider the sector ETFs with the most relative strength: Biotech (BBH), Semiconductors (SMH), and Gold (GLD). For short ideas, we like the following sectors: Retail (RTH), Utilities (UTH), REITS (IYR), Home Construction (no ETF), and the DJ Industrials (DIA). Above all, don’t try to predict where the markets will go from here. Rather, trade what you see, not what you think!

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Today’s Watchlist:

SMH – Semiconductor HOLDR
Long

Trigger = above 36.82 (above daily downtrend line)
Target = 38.30 (resistance of Aug. 2 high)
Stop = 36.15 (below yesterday’s low)
Shares = 300

Notes = As discussed in the commentary above, SMH has come into support of its primary uptrend line on the weekly chart, and is also now poised for entry on the daily chart (above). We are prepared to buy a resumption of the uptrend, but our target is only the prior high from August 2. Therefore, the stop is correspondingly tight as well. As always, the trigger price for entry is important, because we don’t want to “jump the gun” by anticipating a resumption of the trend without first having confirmation.

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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 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):

UTH short (300 shares from Aug. 10) –
shorted 113.13, new split stop: half at 112.30, half at 114.25, target 107.80, unrealized points = + 1.78, unrealized P/L = + $534

RTH short (400 shares from Aug. 5) –
shorted 100.20, stop 101.45, target 95.20, unrealized points = + 1.4, unrealized P/L = + $560

EWA long (800 shares from Aug. 3) –
bought 18.36, new stop 18.13, target of new highs (will trail stop), unrealized points = (0.06), unrealized P/L = ($48)

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

$87,565

Notes:


We have changed the UTH to a “split stop” as per above. We have also lowered the stop on EWA because its opening gap down below our original stop price triggered the MTG Opening Gap Rules. Therefore, new stop is 10 cents below yesterday morning’s low.

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