The Wagner Daily


For the first time in nearly a month, each of the major indices rallied sharply AND on higher volume than the previous day. This made yesterday a clear “accumulation day,” and was a sign that institutions were participated in the buying. While the Dow Jones Industrial Average and S&P 500 Index have both had numerous “accumulation days,” it has been more than three weeks since the laggard Nasdaq Composite closed higher and on higher volume than the previous day. Most of the leadership came from the Nasdaq yesterday, with the Semiconductor Index ($SOX) leading the way with nearly a 4% gain. The Nasdaq Composite closed 1.8% higher yesterday and on volume that was 14% higher than the previous day, although volume still came in below its 50-day average. While the Nasdaq showed a similar price gain on December 11, total market volume declined that day and did not confirm institutional support of the rally. November 24 was the last day the Nasdaq showed a decent gain and on higher volume. The Dow Jones Industrial Average once again continued its upward march yesterday and closed at yet another 52-week high with a gain of 1.0%. The S&P 500 Index also closed at a new 52-week high yesterday with a gain of 1.2%. Although it initially met resistance at the high of Monday’s opening “Saddam gap,” the index pushed through that level in the afternoon.

One of the primary reasons we have been moderately bearish on the broad market over the past two weeks was the Nasdaq’s bearish technical picture. Specifically, we have been referencing the Nasdaq’s multiple “distribution days,” its inability to hold above both its 50-day moving average and primary uptrend line, the bearish moving averages crossover in the Nasdaq 100 Index, the bearish chart pattern of the $SOX index, and the quadruple top on the daily chart. Although we have had FIVE good reasons to be short the Nasdaq and its related indices (such as IWM), the problem has been the strong divergence in the Dow Jones Industrial Average, which continues to set new 52-week highs. When the major indices get so far out of sync with each other, the strength or weakness of one of the indices eventually wins the tug-of-war and pulls the other indices along in the same direction. Typically, the broad market follows the Nasdaq, and not the other way around, but the Dow’s recent strength was surely a factor in yesterday’s “accumulation day” and sharp rally in the Nasdaq. It was as if traders suddenly figured out that the Nasdaq had been forgotten about for the past several weeks. Yesterday’s rally in the Nasdaq Composite put the index back above its 50-day moving average and its primary uptrend line, but still well below resistance of its 52-week high. Unlike SPY (S&P 500 Index), QQQ (Nasdaq 100 Index) was unable to break above the high of Monday’s opening gap. The chart of QQQ below illustrates how the Nasdaq 100 Index rallied back above its 50-day MA, but still has a lot of overhead price resistance in this area:

One family of ETFs that we trade occasionally, but rarely discuss, is the fixed-income (bond) ETFs. The four primary ETFs in this family are LQD (Corporate bond), SHY (1 – 3 yr. T-bond), IEF (7 – 10 yr. T-bond), and TLT (20 + year T-bond). If you wish to participate in the bond market, but prefer the simplicity of ETFs, these are ideal instruments for doing so. One thing that caught our attention was that TLT gapped up on December 17 and broke above a downtrend line that has been in place since September 30. It subsequently followed through with additional gains the next day and now looks like it could be entering into a “mini-rally” that will probably cause TLT to at least test its prior high of September 30. Therefore, TLT may be in play now on the long side. The daily chart of TLT below illustrates this:

MTG has written a more detailed article on the fixed-income ETFs, so we suggest you check it out if you are interested in learning more about them. You can read the article by clicking here to view the April 7, 2003 issue of The Wagner Weekly.

Today is a “quadruple witching” day, which means that four different types of options and futures contracts expire today. This occurs four times per year, always on the third Friday of the last month in each calendar quarter. While a “quadruple witching” day directly affects options and futures traders more than stock or ETF traders, broad stock market action is typically very erratic because of all the institutional positioning that occurs as institutions attempt to move stocks toward the “strike prices” that will provide them with maximum benefit. Therefore, we recommend you use an extra ounce of caution in today’s trading, especially in the afternoon when the erratic action usually becomes more apparent.

Today’s watch list:

Due to the erratic trading patterns usually exhibited on Quadruple Witching Options Expiration day, there are no new plays today. In fact, it may be a good day to do your holiday shopping.

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:

    DIA short (HALF position from Dec. 17) –
    shorted 101.19, covered 102.10, points = (0.91), net P/L = ($94)

    IWM short (from Dec. 16) –
    shorted 105.88, covered 108.11, points = (2.23), net P/L = ($226)

Open Positions:



We were stopped out of the HALF position in DIA and IWM yesterday. The sell stop for DIA re-entry never triggered, so we are “officially” flat now. Will re-assess after options expiration has passed today.

Edited by
Deron Wagner,
Founder and President