The Wagner Daily | November 28, 2003

Commentary:

As
we often see during pre-holiday sessions, total market volume was very light on
Wednesday, which resulted in roller-coaster type price action in the major
indices. Volume in both the NYSE and Nasdaq came in approximately 18% lighter
than the previous day and was also the lowest volume day since October 13. When
volume is lighter than usual, intraday trend reversals often happen quickly and
easily because it only takes a small amount of buyers or sellers to step in and
change the direction of the trend. This is one of the reasons why we always use
caution with intraday trading on days when the total market volume is lighter
than average. Wednesday’s low-volume price action was no exception as the bears
took control of the morning session, but the bulls stepped in during the
afternoon and caused each of the major indices to close slightly higher on the
day.

Despite Wednesday afternoon’s rally, SPY (S&P 500 Index) was
unable to break above the previous day’s high and the 106.40 area acted as
strong resistance (1058 on the S&P 500 Index). The 15-minute chart of SPY
below illustrates Wednesday’s mid-day trend reversal, but failure to break above
the previous day’s high:

While SPY closed near the previous day’s high, both DIA (Dow Jones
Industrial Average) and QQQ (Nasdaq 100 Index) showed relative weakness and
closed below their morning highs, as well as their highs of the previous day.
The 15-minute chart of QQQ below illustrates how the Nasdaq lagged behind the
S&P 500 in the afternoon:

On the chart above, notice how, unlike SPY, QQQ did not have enough
momentum to rally back to its morning high. Conversely, both MDY (S&P
Mid-Cap Index) and IWM (Russell 2000 Small Cap Index) quietly showed relative
strength and actually closed at new 52-week highs. This is not surprising
because both the small and mid-caps have been showing the most relative strength
in the broad market over the past month, while the large-cap blue chips and many
technology stocks have lagged. But, since the financial media generally only
discusses the “big three” indices (Dow, S&P, and Nasdaq), new highs in the
small and mid-cap indexes are often ignored.

In addition to Wednesday’s
relative weakness in QQQ, we also noticed that the Nasdaq began forming the
right shoulder of a head and shoulders
pattern on its daily chart. The head and shoulders is a bearish chart
pattern that usually points to lower prices, assuming it follow through with its
completion. We have labeled the elements of the head and shoulders pattern on
the daily chart of QQQ below (moving averages have been removed so you can more
easily see the chart pattern):

As you can see, the right shoulder of the pattern is currently in the
process of being formed, but this is not yet confirmation that the pattern will
follow through and break below the neckline. However, if it does, the predicted
amount of the drop on a head and shoulders pattern is generally equal to the
distance from the top of the head down to the neckline. Since the head is at the
$36 area and the neckline is formed at the $33.75 area, the distance between
those two levels is 2.25 points. This means that, if the neckline is broken, the
predicted drop will be 2.25 points below the neckline, which gives us a target
price of $31.50. Furthermore, the right shoulder is currently lower than the
left shoulder, which is bearish as well.

The formation of the right
shoulder and Nasdaq’s relative weakness on Wednesday are the primary reasons we
initiated a short position in QQQ for a swing trade. However, we only shorted a
half position of QQQ to “test the waters” because the pattern has not yet
confirmed itself. Confirmation of pattern follow-through will occur when/if QQQ
breaks below last week’s lows, and hence its neckline. At that point, we would
consider adding to the position. On the other hand, we need to be on guard for a
potential pattern failure, which would occur if QQQ rallies above the head at
the $36.20 area, which would also represent a new 52-week high. If this occurs,
a failed head and shoulders pattern is just as bullish as a completion of the
head and shoulders pattern is bearish.

Just a reminder that the U.S.
equities markets will close early at 1 pm EST today. We once again expect volume
to be light, which means that intraday trends cannot be trusted to a high
degree. Historically, the half day session after Thanksgiving Day is usually an
up day, but not always. Many historical patterns have been proving false this
year, such as the market’s failure to have a traditional October sell-off. So,
we strongly recommend relying on chart patterns and technical analysis today,
rather than assuming the market will go up just because it is a holiday session
that usually sees gains.

Today’s watch list:

PPH – Pharmaceutical HOLDR
Long

Trigger = above 75.30
(above Wednesday’s high)
Target = 77.40 (retest of prior highs)
Stop =
74.30 (below Nov. 25 low)

Notes = The Pharmaceutical Index has corrected
through a 50% retracement of its most recent rally, which we profited from in
mid-November. The index formed a bullish reversal candle on Wednesday after
finding support at its 50% retracement and closed above both its 20 and 50-day
MAs. We anticipate that PPH will now begin to head higher to test its prior high
at 77.50 area. We will buy on a break above Wednesday’s high. Remember you can
track the price of PPH by following its index, which is $IPH.X. You trade PPH,
but track the price of its index for more accurate pricing without the wide
spread. Always use limit orders when trading PPH.

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 (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:

net P/L = + $49

Open Positions:

unrealized P/L = +
$40

QQQ short (1/2 position from Nov. 26) –
shorted 34.95, new
stop at 36.20, new target 31.50 unrealized points = (0.39), unrealized P/L =
($78)

EWJ long (1/2 position, averaged from Nov. 17 and 19) –

bought 8.66 (avg.), stop at 7.90, unrealized points = + 0.27, unrealized
P/L = + $108

Notes:

OIH hit our original profit
target on Wednesday, so we sold half the position into strength and have raised
the stop on the remaining shares. We will continue trailing a stop on the
remaining half position until it is stopped out. Per intraday e-mail alert, we
also shorted a half position of QQQ for a swing trade. After studying the QQQ
head and shoulders pattern more thoroughly, we have adjusted the stop and target
prices as noted above. We only have a half position of QQQ in order to reduce
risk, but we will consider adding to the short position after it breaks the
neckline (see commentary above). The HHH short setup did not
trigger.

Edited by Deron Wagner,
MTG Founder and President