The Wagner Daily | July 22, 2003

Commentary:

Last Friday’s light volume and narrow-based rally was not enough to provide support to the major indices yesterday, so the broad market once again resumed last week’s selloff. Going into the day, we had a neutral bias and basically expected the major indices to chop around sideways within Friday’s range. Instead, the S&P, Dow, and Nasdaq spent the morning in yet another downtrend, breaking Friday’s lows, before subsequently trading sideways in the afternoon. DIA (Dow Jones Industrials) continued to show relative strength and was the only one of the three major broad-based ETFs that never broke below and also closed above Friday’s low. However, the Nasdaq also began showing signs of relative strength in the afternoon session, particularly during the final hour of trading. When the Nasdaq begins showing relative strength late in an afternoon session, it often sets a bullish tone for the next morning. As such, we bought a small position of QQQ (Nasdaq 100 Index) in the ETF Real-Time Room before the close yesterday and took it overnight. We will look for signs of strength in the SOX (Semiconductor) Index today for confirmation of a Nasdaq reversal.

The most important thing to note about yesterday’s selloff was that it occurred on light volume. As you may recall, last week’s volume pattern was bearish and consisted of several high-volume “distribution days,” and only one day in which the market rallied, on lighter volume than the previous day. The high volume selling and light volume buying of last week was bearish, but yesterday’s volume action caught our attention because it was the first day since the selloff began one week ago that the major indices closed lower on the day, but on significantly lighter volume than the previous day. The total volume in both the NYSE and Nasdaq was more than 8% lower than the previous day, which was already a light volume day to begin with. From this, we can infer that the sellers may be drying up, at least in the short-term because yesterday’s selloff was not market by an abundance of sellers, but rather a simple lack of buyers. This means that the sell-side volume seems to have declined over the past two days, but the market just needs some buyers to step up to the plate and support the prices. Unfortunately, since we are smack in the middle of the Summer doldrums we may not see a heavy institutional commitment to stocks for another two months. But, based on weekly charts, I would be surprised if the gains of the past four months suddenly disappeared. A more likely scenario is that the broad market enters a period of sideways consolidation, which would actually be healthy because it would build a solid base from which the market could potentially make another leg higher. Of course, since the monthly charts still look bearish, it is quite foggy as to how much higher the market will go over the next six months to a year.

In yesterday’s newsletter, we showed you daily charts of SPY, QQQ, and DIA and mentioned that each one of those ETFs was nearing key support levels of either their 20 or 50-day moving averages. Interestingly, SPY (S&P 500 Index) traded down to support of its 50-day moving average yesterday before bouncing off of it and closing just above the low of last week. Yesterday’s low in SPY was 97.85 and the 50-day MA was at 97.80. The daily chart of SPY below illustrates the perfect bounce of the 50-day moving average:

As you know, DIA (Dow Jones Industrials) has been showing relative strength to SPY and is still clinging to support of its 20-day moving average after a brief intraday probe below it yesterday. The 20-day moving average in DIA is at 91.14 and DIA closed yesterday at 91.15. Meanwhile, further support of DIA remains at the 50-day moving averages, which is at 89.94. The daily chart of DIA below illustrates how DIA has found support at its 20-day MA for the past several days:

Although QQQ (Nasdaq 100 Index) closed below its 20-day MA yesterday, it did so only by a small margin. The 20-day MA of QQQ is at 30.98 and QQQ closed at 30.88. However, if today’s pre-market gap in the futures holds into the market’s open, QQQ will open above 31 and therefore above its 20-day moving average. Here is a daily chart of QQQ as well:

Based on the drop in selling volume over the past two days and the fact that the major indices are all sitting at or near key moving average support levels, odds are pretty good that the market bounces and closes higher today. However, I don’t expect today to be a smooth uptrend because that requires strong buying volume, which is something that seems to have taken a break. Instead, a more likely scenario is a choppy and range bound trading session with an upward bias. If that occurs, remember to reduce your position size in order to limit losses if you get “chopped up.” Or, better yet, just use looser stops combined with smaller position size so that you can sit through the market’s wiggles. Either way, take it easy with the quantity of trades until the volume returns to the market. Remember also there are still a lot of earnings reports due out for the remainder of the week, so be aware of the key reports that could move the market. The Yahoo! Finance web site is great for that.

Today’s watch list:

SMH (Semiconductor HOLDR)
Long

Trigger = above 31.10 (above hourly downtrend line and 20-MA/60 min.)
Target = 32.90 (resistance of prior high on July 16)
Stop = 30.75 (below yesterday’s close)

Notes = We have been seeing recent signs of sector rotation into the Semis lately and anticipate that sector as being one of the strongest when the market bounces. In addition, TXN reported earnings last night and was last seen trading higher after hours and in the premarket. This indicates a change in sentiment within the Semis.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from
The Wagner Daily (ETF Intraday Real-Time Room trades are reported
separately in The Wagner Weekly). Net P/L figures are based on the
quantity of shares represented in the MTG Position Sizing
Model.

Closed Positions:

(none)

Open Positions:

unrealized P/L = ($202)

Notes:

Due to the negative reaction of Merck’s earnings report yesterday morning, the Pharmaceutical sector was weak and PPH never triggered yesterday. Therefore, our only open position from plays called in The Wagner Daily is the EWJ position.

Click here for
a detailed explanation of how daily trade performance is calculated.

Click here for a detailed
cumulative report of MTG’s trading performance (updated weekly)

Glossary and Notes:

Remember that opening gaps that cause stocks
to trigger immediately on the open carry a higher degree of risk because the
gaps (both up and down) often do not hold. Use caution if trading stocks with
large opening gaps.

Trigger = Exact price that stock must trade
through before I will enter the trade. If a long position, I will only enter the
stock if it trades at the trigger price or higher. For a short position, I will
only enter the stock if it trades at the trigger price or lower. It is really
important to only enter the position if the trigger price is hit, otherwise the
trade becomes riskier.

Target = The anticipated price I am
expecting the stock to go to. However, this does not mean that I will
always hold the stock to that price. If conditions warrant, I will sometimes
take profits before that price, in which case I will notify you of the
change.

Stop = The price at which I will have a physical stop
market order set. As a position becomes profitable, this stop price will often
be adjusted to lock in profits. Again, you will always be notified of such
changes in the next daily report or intraday if you subscribe to intraday
updates.

SOH = Sit On Hands (Don’t Make Trades)

Closed P&L
under Deron’s Report Card is based on the actual price I closed my trade at, not
just the theoretical target or stop price listed for each stock. Open P&L is
based on the closing prices of the most recent trading day.

Unless
otherwise noted, average holding time is 1 to 3 days once a position is
triggered. Updates on open positions are provided daily.

Yours in success,

Deron M. Wagner