Seat belts were required in Wednesday's session, as the intraday market action was a wild roller coaster ride. Initially blowing off the previous day's post-Fed weakness, and aided by a positive earnings report from tech giant Cisco Systems, the Nasdaq Composite (COMP | Quote | Chart | News | PowerRating) gapped open above Tuesday's high. The initial excitement faded promptly, causing the market to drift lower throughout the first ninety minutes of trading, but a wave of buying in the mid-day doldrums launched the Nasdaq to a new high of the day. Just when the bulls began to get comfortable, the bears took control in the afternoon, sending stocks to new intraday lows. By day's end, each of the major indices had given back sizeable gains and finished at their worst levels of the day. The Nasdaq closed only 0.1% lower, but it was quite bearish that the index surrendered its early 1.8% gain. The S&P 500 (SPX | Quote | Chart | News | PowerRating) similarly turned a 1.0% intraday gain into a 0.4% closing loss. Blue chips showed relative weakness for a change, as the Dow Jones Industrial Average (DJX | Quote | Chart | News | PowerRating)  fell 0.9%. The small-cap Russell 2000 also slid 0.9%, while the S&P Midcap 400 lost 0.7%. Separately, the price of spot silver continued its steady ascent, pushing the iShares Silver Trust (SLV | Quote | Chart | News | PowerRating) several points higher. Presently, our long position in SLV is showing a marked-to-market gain of more than 10 points, but it has not yet hit our price target. We will continue trailing a stop tighter as it moves further into the money.

Higher volume in both exchanges caused both the S&P and Nasdaq to sustain its second consecutive "distribution day." Total volume in the NYSE rose by 5%, while volume in the Nasdaq was 10% higher than the previous day's level. Although the actual percentage loss in the Nasdaq was minimal, the session was definitely driven by institutional selling because the index plummeted nearly 2% in the afternoon and closed at its low. In the NYSE, declining volume exceeded advancing volume by a ratio of 2 to 1, but advancing volume eked out a marginal lead over declining volume in the Nasdaq.

Just as we often see morning downtrends reverse into afternoon uptrends in strong markets, it is equally common for the market to surrender intraday gains in weak markets. If you check out a daily candlestick chart of the S&P 500, you will notice "wicks" or "tails" above the bodies of many candles over the past week. Each one of those candlestick formations indicates a failed intraday breakout attempt. As anticipated, the S&P 500 also broke down below its 200-day moving average yesterday, benefitting our long position in the UltraShort S&P 500 ProShares (SDS). The S&P still has support of both its 20 and 50-day moving averages below, but the break of the 200-MA, combined with the recent failed breakout attempts, is probably more significant. Although it still has a long way to go, we feel the odds are increasingly good that the S&P 500 will soon re-test its prior low from July 18. If it does, beware of a potential breakdown to a new low because it will be the third test of support at the 1,220 to 1,225 area. The failed breakout attempts in the S&P are highlighted on the chart below:

Since it has been showing relative weakness to the broad market nearly every day, the Russell 2000 Index is much closer to breaking its July low than the S&P 500. As you may recall, we initially sold short the iShares Russell 2000 (IWM | Quote | Chart | News | PowerRating) on August 1 when it formed the right shoulder of a bearish "head and shoulders" formation on its daily chart. It subsequently attempted to break out above its 200-day MA on August 4, but the breakout failed and IWM missed our stop by less than a nickel. We still remain short IWM, which is now only than 1.4 points above its prior low. If the broad market weakness continues, the Russell 2000 should be the first index to fall below its prior low from July. The daily chart of IWM below shows how it has started to roll over and is rapidly nearing its prior low.

In recent weeks, the Dow was one of the few indices holding the market up. But now the Dow has also begun to show relative weakness, making a short sale in the DIAMONDS (DIA | Quote | Chart | News | PowerRating) an interesting possibility. Before doing so, however, we would first want to see the Dow fall back below its 200-day MA at the 11,000 level. The $SOX broke out above its three-month downtrend line on August 3, but has gone absolutely nowhere since then. The index tried to get a rally going on August 4 and 9, but failed to hold its gains both times. If the Dow has started to roll over and the $SOX keeps failing its breakout attempts, we must ask the question, "What will save the market from testing and perhaps breaking below its prior lows?" The trend is your friend, and the simple fact is the major indices remain in their downtrends that started in mid-May.

Open ETF positions:

Short IWM, long SLV, SDS (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 .