The biggest factor likely to move the markets this week

The broad market attempted to recover
from an opening gap down last Friday morning
, but the bears took
control in the afternoon, causing the major indices to close firmly lower and
near their intraday lows. Small-cap stocks showed the most relative weakness, a
pattern that was prevalent throughout the May to June broad market selloff, as
the Russell 2000 Index fell 1.6%. The 1.2% loss in the Dow Jones Industrial
Average
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shows us that blue chips did not fare much better. The Nasdaq
Composite
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also closed 1.2% lower, while the S&P Midcap 400 Index
declined 0.9%. The S&P 500 again ran into resistance of its 50-day moving
average, prompting a 0.7% loss.

Total volume in the Nasdaq increased by 9% last Friday, giving
the index its second “distribution day” within the past three sessions. Recall
that the Nasdaq gained on higher volume in the prior session, but we pointed out
it was not really an “accumulation day” because the index gave back most of its
intraday gain and finished near its low. In the NYSE, turnover was 1% lighter
than the previous day’s level, but pockets of institutional selling was still
apparent in leading stocks. Market internals were firmly negative across the
board. Declining volume exceeded advancing volume by a margin of 4 to 1 in the
Nasdaq and 5 to 2 in the NYSE.

The biggest factor likely to move the markets this week is
traders’ reactions to the slew of quarterly earnings reports on tap. The S&P
500, for example, is stuck between resistance of its 50-day moving average
overhead and support of its 200-day moving average below:



Most likely, the S&P 500 will break out of that range sometime
this week, but the direction of that move will depend on market sentiment
as earnings season kicks into gear. It is positive that the S&P recovered from
its losses in the latter half of June, but a lot of overhead supply remains. It
would only take another wave of heavy selling to send the index back down to
test last month’s lows. As we pointed out last Friday morning, both the Russell
2000 and S&P Midcap 400 indices have nearly the same chart patterns as the S&P
500. The Nasdaq Composite still remains below both its 50 and 200-day moving
averages, as it never recovered back above them. Important earnings reports to
be aware of this week include the following:

  • Monday (after the close) – Alcoa
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  • Tuesday (after the close) – Genentech
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  • Wednesday (before the open) – Genzyme
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  • Friday (before the open) – General Electric
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    Browse earnings.com or your favorite financial web site for a
    complete listing of scheduled reports. If you don’t want any surprises in the
    form of large opening gaps, be sure to check out the scheduled earnings date for
    any companies whose stocks you enter in the coming weeks.

    We plan to take it easy with entering new positions until we
    begin to see the market’s reaction to key earnings reports over the next one to
    two weeks. We recommend tightening your protective stops on both long and short
    positions that are presently open. Consider reducing your share size on any new
    trade entries. Now that we have sold our remaining shares of the StreetTRACKS
    Gold Trust (GLD) into strength, we have two more open positions. As subscribers
    will notice below, we are now using very tight stops on both the DJ Real Estate
    Index (IYR) and the Telecom HOLDR (TTH) in order to protect our gains. Due to
    its relative weakness, we also entered a new short position in the the S&P
    Midcap SPDR (MDY) last Friday. Separately, you may want to check out the
    “Exchange Traded Funds” section of today’s Investors Business Daily
    because I briefly discuss the Telecom HOLDR in an interview with the popular
    financial newspaper. The article also appears in the

    ETF section of the Yahoo! Finance web site
    .


    Open ETF positions:

    Long TTH and IYR, short MDY (regular subscribers to

    The Wagner Daily

    receive detailed stop and target prices on open positions and detailed setup
    information on new ETF trade entry prices. Intraday e-mail alerts are also sent
    as needed.)

    Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of
    Morpheus Trading Group (morpheustrading.com),
    which he launched in 2001. Wagner appears on his best-selling video, Sector
    Trading Strategies (Marketplace Books, June 2002), and is co-author of both The
    Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader
    (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and
    Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and
    financial conferences around the world. For a free trial to the full version of
    The Wagner Daily or to learn about Deron’s other services, visit

    morpheustrading.com
    or send an e-mail to

    deron@morpheustrading.com
    .