The Wagner Daily | September 24, 2003

Commentary:

Yesterday was clearly a day of divergence as the Nasdaq, especially technology-related sectors, showed relative strength while the S&P 500 and Dow Jones both showed relative weakness. The Nasdaq spent most of the day in an uptrend, hovering above the previous day’s high, while both the Dow and S&P spent most of the day trading sideways and even attempting to break to new lows. When the S&P and Nasdaq futures show so much divergence, the end result is typically choppy and indecisive trading conditions, which is how I would define yesterday. This occurred because the Nasdaq was acting as a buoy to pull the S&P higher while the S&P was simultaneously acting as an anchor that attempted to drag the Nasdaq down. In the first half of the day, this caused the S&P to have a false breakdown and also caused the Nasdaq to have a false breakout. However, the broad market began to get in sync with itself during the final ninety minutes of trading as buyers stepped in and caused the major indices to break out to new intraday highs. While the breakout in the Nasdaq was relatively strong, the rally in both the S&P and Dow was short-lived. In fact, both of those indices dropped back down into their intraday trading range during the final fifteen minutes of trading. Nevertheless, each of the major indices closed higher yesterday. The Nasdaq clearly led the way and closed 1.4% higher. The strongest sectors and solid gainers were Internets, Semiconductors, Hardware, and Software, each of which closed several percent higher. The Dow Jones and S&P 500 both lagged and each closed only 0.5% higher. Volume across the board was not extraordinary, but it did come in a few percentage points higher than the previous day in both the NYSE and the Nasdaq. Breadth was also positive, especially the 4 to 1 advancing volume to declining volume ratio in the Nasdaq.

Both the support and resistance levels discussed in yesterday’s Wagner Daily acted perfectly for both the S&P 500 and Dow Jones Industrial Average. As you may recall, we mentioned that the September 22 highs would likely acts as the first resistance level for both SPY and DIA, which is exactly what happened. Below is an intraday chart of SPY (S&P 500 Index) that illustrates how the previous day’s high acted as the initial resistance level:

Looking at the chart above, notice how the previous day’s high, which we warned of yesterday morning, acted perfectly as resistance when SPY initially attempted to break out in the morning. It’s also interesting that the high of 103.00 converged with the 200-period moving average, which caused the resistance to be even more powerful. As you can see, SPY eventually broke above that resistance level due to strength in the Nasdaq, but the breakout was not confirmed and SPY eventually closed just below the breakout level. Notice also how the 20-MA (the orange line) acted as support yesterday while the 200-MA acted as resistance overhead. As we mentioned yesterday, the next resistance level for SPY, beyond 103.00, is the low of September 19, which is 103.40. Therefore, keep an eye on both the 103.00 and 103.40 levels for SPY today. Both prices are likely to act as pivot points. For the S&P futures, 1030 will be the key level to watch.

To illustrate the relative strength in the Nasdaq yesterday, take a look at the same time interval of QQQ (Nasdaq 100) yesterday. Notice how, unlike SPY and DIA, QQQ blew right through both the previous day’s high AND the low of September 19. Also notice how the 200-MA was BELOW the price of QQQ instead of above, as it was with SPY:

Experience has taught me to use caution when the major indices become out of sync with each other. The Dow Jones was the weakest of the major indices yesterday, which is why we shorted that index. It’s unlikely that the Nasdaq will go much higher in the short-term IF the Dow remains relatively weak. At the same time, the Nasdaq could easily drag the Dow higher. So, the bottom line is that shifting into SOH (sitting on hands) mode is not a bad idea until the market resolves itself. The overhead resistance from Monday’s gap down still remains in both the S&P and Dow, although the Nasdaq has filled the gap. If the Dow and S&P fill the gap as well, we could once again see new 52-week highs. But, if the gap is not filled within the next day or two, expect a break to new lows of the week. Most importantly, remain laser-focused on the 20-day moving averages of both the S&P and Dow. The 20-day moving average has perfectly acted as support the past two days. But, as I mentioned before, the distance between each subsequent test of support has gotten shorter, which therefore increases the odds of an eventual break. If the 20-day MA is broken, it will trap many bulls. But, until then, continue to use caution if you are short and tight stops if you are long. Personally, SOH seems like a really good idea!

Today’s watch list:

(There are not any new plays for today. Instead, we will focus on managing our open positions below.)

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 = ($78)

MDY short (from Sept. 22) –
shorted 96.25, stop at 97.85, target 94.25, unrealized points = (0.70), unrealized P/L = ($70)

Notes:

Per yesterday’s newsletter, we shorted DIA when it broke the low of the first 30-minutes of trading, which was 95.40. We also remain short MDY. We are using the same stops for now, but will trail them lower as we are able. We may also incrementally scale out of partial position size to reduce risk. If we do, you will be notified via e-mail alert.

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