The Wagner Daily | July 14, 2006

Commentary:

The S&P 500’s break of its 200-day moving average triggered a sharp selloff yesterday, causing a lot of technical damage to the charts of the major indices. Stocks fell swiftly in the first thirty minutes of the session, but attempted to reverse in the late morning. By mid-day, each of the major indices had rallied back up to their morning highs, but traders sold into strength, resulting in another wave down in the afternoon. By the closing bell, each of the indices had dropped to and finished at new intraday lows. The S&P 500 and Dow Jones Industrial Average lost 1.3% and 1.5% respectively, while the Nasdaq Composite plummeted 1.7% to its lowest closing price since October of 2005. The S&P Midcap 400 Index also declined 1.7%, but the small-cap Russell 2000 fared even worse with its 2.0% loss.

Although turnover declined when stocks sold off in the previous session, institutional selling returned to the scene yesterday. Total volume in the NYSE spiked 20% higher, while volume in the Nasdaq was 12% higher than the previous day’s level. The losses on higher volume caused another “distribution day” to register for both the S&P and Nasdaq. Since the month began, the Nasdaq has closed lower in five out of eight sessions. Volume was higher in three of those five “down” days, but higher in only one of the three “up” days. This negative pattern of the broad market’s price to volume ratio shows that institutions are continuing to dump shares into any strength. Firmly bearish market internals confirmed yesterday’s price action. In both exchanges, declining volume exceeded advancing volume by more than 7 to 1.

Since we have focused primarily on specific industry sectors over the past several days, let’s take an updated look at the charts of the major indices. Yesterday’s action caused all the broad-based indices to break some sort of key support level, but the Nasdaq Composite suffered the most significant technical damage. Remember when we mentioned a few days ago that the performance of the Semiconductor Index ($SOX) usually leads the performance of the Nasdaq overall? Specifically, when the $SOX fell below its prior low from June 14, we felt it was an ominous sign for stocks overall because the Nasdaq tends to follow the direction of the heavily-weighted $SOX index. If you paid attention to that breakdown to a new low in the $SOX, you therefore should not have been surprised that the Nasdaq followed suit to a new low yesterday as well:

The Nasdaq’s close below the June 14 low of 2,065 caused the index to set a new nine-month low. As such, the rally that took place from the middle of June through the beginning of July is now completely dead. More importantly, the Nasdaq has set another “lower low” to match the “lower high” that was set in July 3. The downtrend that began at the beginning of May is still in full effect. Furthermore, a lot of overhead supply has been left in the wake of the Nasdaq’s drop to a new low, so expect any subsequent rally attempt to be met with resistance of further selling into strength.

Of the major indices, the Nasdaq is the only one that has already broken support of its June low, but the other indices are catching up as well. The Dow closed back below its 200-day moving average yesterday, a bearish sign for the direction of its long-term trend. The S&P 500 slid further below its 200-day moving average that it broke below on Wednesday. Equally notable is that yesterday’s loss caused the S&P to fall below support of its uptrend line from the mid-June low. Take a look:

If you check out the daily charts of the Dow Jones Industrials, Russell 2000, and S&P Midcap 400, you will notice that each index broke support of its uptrend line from the June lows as well. This bodes well for our short position in the S&P Midcap SPDR (MDY), as our downside price target is support of its June low. We still expect MDY to test that low in the near future, but we covered one-third of the position yesterday to lock in a gain of nearly four points on partial share size. We will continue trailing a stop lower on the remaining shares in order to maximize profit while locking in gains.

Our reversion back to a negative short-term bias has certainly been confirmed by the price action of the past several days. Our bearish intermediate-term bias that we assumed in late May never changed, despite the late June bounce. There will occasionally be upside retracements, sometimes fast and furious, within the context of the current downtrend, but there is nothing to indicate the selling is finished or that stocks have found a market bottom. It is crucial that you are vigilant with regard to cutting losses on any long positions that fall more than 7 or 8% below your entry price. Failure to stick with a plan of protective stops could easily result in the rapid disappearance of your trading capital when downside momentum is so strong. Live to trade another day by maintaining discipline to cut your losses. Better yet, follow the trend of the market and profit instead.

Today’s Watchlist:

There are no new setups for today, as we need to patiently await a proper bounce to enter new short positions into strength. If the bounce comes, we are prepared with a list of potential short entries. But if stocks continue lower without a bounce, we will simply ride the profits on our MDY short position. As always, we will send an intraday e-mail alert if/when we enter any new trades.

Daily Performance Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:

Open positions (coming into today):

stop 137.68

unrealized P/L = + $838

Closed positions (since last report):

net P/L = + $375

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

$26,700

Notes:

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