Table of Contents


• Broad Market Analysis - Give your stocks plenty of "wiggle room"
• MTG Stalk of the Week - CHAP short
• ETF Trend Tracker weekly commentary

Broad Market Analysis - Give your stocks plenty of "wiggle room"

After three days of bullish consolidation near their highs, the major indices succumbed to a bout of institutional selling. After gapping higher on the open, stocks chopped around in a range throughout the first half of the session. With ninety minutes remaining, heavy volume selling kicked in when the broad stock market indexes began breaking below the lows of their recent ranges. The S&P 500 swooned 1.4%, the Dow Jones Industrial Average shed 1.1%, and the Nasdaq Composite lost 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 1.4% and 1.0% respectively. Each of the major indices finished at their lowest levels of the session, increasing the odds of downside momentum in today's open.

Turnover rose across the board, indicating the presence of institutional distribution. Total volume in the NYSE registered 15% above the previous day's level, while volume in the Nasdaq increased by 4%. In both exchanges, declining volume firmly exceeded advancing volume by a margin of 4 to 1. Yesterday's higher volume selling marked the sixth "distribution day" for both the S&P and Nasdaq in approximately the past month. When the stock market experiences more than four or five such days of institutional selling within a four-week period, it is usually quite difficult for stocks to retain their gains for long. To wipe out the bearish overhead supply created from the recent string of "distribution days," the S&P and Nasdaq would require a high volume surge with closing prices at new highs. Otherwise, the market's price to volume relationship will continue to show general weakness "under the hood."

In yesterday's Wagner Daily, we concluded our daily commentary by saying, "The broad market's narrow-range consolidation of the past three days is bullish, as it is enabling stocks to correct by time, rather than price. . .Given that stocks have retained last week's gains, overall sentiment has reverted to being moderately bullish. Only a breakdown below the 20-day EMAs of the S&P, Dow, or Nasdaq again would change that." As one might have surmised, yesterday's 1.4% drop indeed pushed the S&P 500 back below its 20-day EMA. This is shown on the daily chart below:

The rapid ascent that followed the June 13 bounce off the 50-day MA shoved the S&P 500 to within just several points of its prior high, but yesterday's bearish reversal and break of the 20-day EMA was equivalent to more than a 50% Fibonacci retracement of the upward move. Given the market's erratic behavior in recent weeks, this certainly does not mean the S&P will now fall to its June low. However, the odds of the index busting out to new highs by month-end are now severely diminished, especially considering the number of "distribution days" on the table.

As has been the case for the past four days, the Nasdaq continues to look better than the S&P. Although it failed its recent breakout attempt by falling below its June 4 high, the index is still holding above its 20-day EMA. It has also pulled back to only the first major Fibonacci retracement level of 38.2%. Yesterday's weakness caused some technical damage, but not so much that the Nasdaq couldn't snap back in a few days:

Fortunately, our long setup in the Nasdaq 100 Index Tracking Stock (QQQQ) missed our trigger price by 10 cents yesterday. Though we were prepared to buy the breakout to a new high, we followed our rules of giving all stocks and ETFs a bit of "wiggle room" beyond key support and resistance levels. Specialists and market makers know that amateur investors often place stop orders right at the most obvious support and resistance levels. As such, their huge leverage enables them to "juice" the market just enough to run those stops and scoop up shares at the best prices. In this case, QQQQ probed just 5 cents above its three-day range, enabling market makers to trigger the buy stop orders and sell their shares at the highs before reversing sharply lower. This is illustrated on the 60-minute intraday chart below:

Going into yesterday, the three-day high of QQQQ was 47.87 (the horizontal line on the chart above). Since QQQQ has an ATR (average true range) of about 50 cents, we need to allow for at least 10 cents of "wiggle room" for buy stops above resistance and sell stops below support. That meant our minimum trigger price for entry was 47.97. However, when a trigger price is so close to a whole number, we always move the stop to just above it because many investors simply use whole numbers as their stop prices. Therefore, our trigger price for entry was 48.02. If QQQQ had rallied enough to hit that price, the rally would have had a better chance of "sticking." But since it missed our trigger price, there was no harm done. We believe it's always better to pay a slightly higher price for entry, in exchange for a better chance of not getting sucked into a false breakout.

Going into today, the S&P is poised to continue its downward momentum and once again test its 50-day MA. Conversely, the Nasdaq could attempt to brush off yesterday's weakness and grind its way back to the high. The schizophrenic behavior of the market over the past month, along with the current mixed signals, mean it's probably best to avoid trading the broad-based ETFs right now. Instead, focus on individual sectors with relative weakness and/or strength. Semiconductors ($SOX), Computer Networking ($NWX), Retail ($RLX), and Internet ($GIN) all held up relatively well yesterday. (Editor's note: Due to strength in the $SOX today, subscribers to The Wagner Daily were informed via intraday e-mail alert of our long entry in SMH today, at the $38.25 area. So far, the trade's working well, confirming the semis are perhaps the best sector to be long right now.) On the downside, Utilities ($DJU) collapsed (again). Broker-Dealers ($XBD), Banking ($BKX), and Transportation ($DJT) all have bearish chart patterns. Oil ($XOI) corrected sharply yesterday, but it's too early to tell whether it was the start of something deeper. Also, watch the international ETFs for a possible resumption of the weakness we saw in early June.

If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.

In this column, MTG presents you with a FREE, actual trade setup that we are stalking for entry at some point during the week. Note that, unlike the daily guidance that regular Stalk Sheet subscribers receive, this free Stalk of the Week does not take into account overall broad market conditions that can easily affect the trade over the next several days. This week's setup is: