The S&P 500 is building a new base of support

A broad-based rally yesterday morning
faded throughout the afternoon,
leaving most of the indices with only
minor gains. The S&P 500 was trading 0.6% higher just before noon, but it
drifted lower after failing to penetrate resistance of the previous day’s high.
The index finished with only a 0.2% gain. Both the Nasdaq Composite and
small-cap Russell 2000 indices followed similar intraday patterns and eked out
gains of only 0.1%. The Dow Jones Industrial Average showed relative strength by
advancing 0.7% and finishing in the upper third of its intraday range. The S&P
Midcap 400 closed 0.3% higher. As planned, we sold the remaining half position
of the StreetTRACKS Gold Trust
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when it tested resistance of its 50-day
MA. We netted a gain of approximately 4.5 points on the trade.

Total volume in the NYSE declined by 6% yesterday, but volume in the Nasdaq was
1% higher than the previous day’s level. Despite having gained on higher volume
yesterday, we would not classify the Nasdaq as having had an “accumulation day.”
When an index surrenders most of its intraday gain and closes near the low of
its range, it is typically bearish. Like the overall volume levels, market
internals were mixed as well. In the NYSE, advancing volume exceeded declining
volume by a margin of nearly 3 to 2. The Nasdaq ratio, however, was negative by
nearly the same spread.

Over the past four sessions, the S&P 500 has been consolidating near its June 29
high, while the Nasdaq has given up a portion of that day’s gain. It’s positive
that the S&P has been able to retain its recent gains and is building a new base
of support, but the index still has not cleared resistance of its 50-day moving
average. Notice how that moving average has, thus far, prevented the S&P 500
from building on its June 29 gain:

Even if the S&P manages to close above its 50-day MA, remember that resistance
of the prior high from June 2 (marked by the dashed horizontal line) is also
significant. Its seven-week downtrend line was broken on June 29, but the
primary downtrend has not yet reversed into an uptrend. We cannot technically
declare a reversal of the S&P’s intermediate-term downtrend unless the index
closes firmly above that June 2 high. Such an occurrence would represent the
formation of a “higher high” to complement the “higher low” that was recently
established. Support of its 200-day moving average just below its current price
is positive, but it doesn’t mean much until the index can overcome its prior

The small-cap Russell 2000 and the S&P Midcap 400 indices typically show
relative strength and lead the other major indexes in a strong market.
Conversely, both indices typically fall the hardest when stocks enter a period
of correction. Because the price action of small and mid-cap stocks serves as an
accurate market indicator, it’s a good idea to monitor the Russell 2000 and S&P
Midcap 400 indices on a regular basis. Taking a quick look at the daily charts
of both the iShares Russell 2000
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and the S&P Midcap SPDR
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you will notice that both ETFs are showing similar patterns to the S&P 500 in
that they are stuck at their 50-day moving averages and remain below resistance
of their June 2 highs.

Quarterly earnings season kicks into gear next week, so be
aware of the exact corporate earnings dates for any new stock positions you
enter in the coming weeks. As you probably already know, stocks often ignore
technical patterns and exhibit highly erratic price action when companies
surprise investors with better or worse than expected numbers. There are several
web sites that enable you to search for corporate earnings dates, but we like
the free site.

Open ETF Positions:

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(regular subscribers to The Wagner Daily receive
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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 (,
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 or send an e-mail to .