Here are the levels SMH and BBH could rally up to

Yesterday’s session was an erratic
and volatile one that resembled a roller-coaster ride, but the major
indices eventually finished the day lower, as volume increased across the board.
By mid-day both the S&P 500
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way down to the previous day’s lows, while the Nasdaq
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most of the prior day’s range as well. After setting their morning lows, the
major indices attempted to reverse and retraced more than half of their morning
losses, but the recovery was short-lived and caused the broad market to drop to
new intraday lows one hour before the close. While the failed mid-day rally and
subsequent setting of new lows would normally have followed through to more
weakness into the close, the broad market reversed once again and the major
indices climbed back to close in the upper third of their intraday ranges. The
S&P 500, Nasdaq Composite, and Dow Jones Industrials finished the wild ride with
losses of 0.3%, 0.4%, and 0.5% respectively. The S&P 400 Smallcap Index lost
0.4% and the small-cap Russell 2000 closed 0.3% lower.

Total volume in the NYSE increased by 22% yesterday, while
volume in the Nasdaq was 18% higher than the previous day’s level. The
broad-based losses, combined with the higher turnover, caused both the S&P 500
and Nasdaq to register another bearish “distribution day,” the fifth one in the
past four weeks. Considering that light volume failed to confirm the prior day’s
rally, it was not surprising that volume surged higher when the sellers
returned. Though it was positive that the major indices showed strength during
the final hour, the losses on higher volume still represented a session of
institutional selling overall.

Both the S&P 500 and Dow Jones Industrials closed yesterday
near the middle of their prior day’s ranges, which means the market could be
choppy today as well. Yesterday’s action also provided several contradictory
signals for the predicted short-term direction of the major indices. The
positive is that both the S&P and Dow twice found support at their respective
lows of the prior day. We have circled that area of support on the 15-minute
charts of both the S&P and Dow below:

While the short-term double bottoms in the S&P and Dow are
positive, note on the charts above that both indices were unable to fill their
downside gaps from the open. Therefore, expect those gaps to act as resistance
going into today. On the S&P 500, resistance is now at the 1,209 to 1,210 area,
while the Dow has resistance all the way up to the 10,435 area. If the S&P and
Dow are able to close yesterday’s gaps, resistance of the August 29 highs is
important too. Beyond that, even more resistance of the 20 and 50-day moving
averages will come into play (as illustrated in yesterday’s Wagner Daily).
Because of these conflicting signals, we recommend you avoid trading in SPY and
DIA at this time, at least until the broad market figures out where to go from
here.

The Nasdaq Composite followed a similar pattern as the S&P and
Dow yesterday, but showed more relative strength throughout the session. When it
sold off in the morning, it found support near the prior afternoon’s
consolidation instead of the dead lows of the day. Then, when it recovered into
the close, it closed only a couple points off its morning high. As such, we
would not be surprised to see the Nasdaq make another run at its 50-day moving
average, which perfectly acted as resistance yesterday. Obviously, it remains
risky to be aggressively long the Nasdaq unless it can recover back above its
50-day MA and hold there for more than a day or two. That being said, however,
both the Biotech
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upside breakout, which could easily pull the Nasdaq higher. We like both BBH
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and SMH
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SMH is able to do so, it should rally at least up to its August 2 high of 38.32,
at which point it would be wise to trail a tight stop in case a double top
forms. In BBH, a breakout above 193 should push the ETF up to test its August 3
high, just below the 197 level.