The Wagner Daily


For the first time in several weeks, the Nasdaq showed relative strength to both the S&P 500 and Dow Jones Industrial Average, as a strong earnings report from Research in Motion (RIMM) spurred a rally in the Nasdaq. Rather than the recent pattern of the Dow Jones setting a new 52-week high and the Nasdaq lagging behind, the opposite occurred yesterday as money began to flow out of the Dow and back into the Nasdaq. The market’s reaction to an earnings report from wireless handheld device manufacturer RIMM was largely responsible for sparking renewed interest in the Nasdaq. RIMM opened at $58 per share after closing at $46 the previous day, then rallied another $11 to close at $69 per share. Much like the market action of leading stocks in 1999, this represented a 50% gain in one day! Although The Wagner Daily focuses exclusively on exchange traded funds and not individual stocks, it is important to pay attention to the market-leading stocks because they typically affect the intraday performance of the broad-based ETFs we trade. In the case of RIMM yesterday, it caused attention to shift away from the mostly “old economy” Dow stocks and back into the growth-oriented Nasdaq. This resulted in a 1% closing gain in ONEQ (Nasdaq Composite Index), but a fractionally negative close in DIA (Dow Jones Industrial Average). Below are intraday charts of ONEQ and DIA that illustrate yesterday’s divergence between the Nasdaq and the Dow. “Percentage change” scaling is used to illustrate the divergence:

As expected, total market volume was low yesterday due to the holiday week. Volume in the NYSE was about 7% lighter than the previous day, but about 4% higher in the Nasdaq. This represented volume levels approximately 24% below average in the Nasdaq and 15% below average in the NYSE. Since both today and Friday are shortened trading sessions, we expect volume to decline even more. Obviously, it’s dangerous to place much trust in any market trends when volume is lighter than average because we don’t know what the “big money” reaction will be when it returns to the markets after the holidays. This is the reason why we are not looking to aggressively enter any new trades for the remainder of the week.

As we have been mentioning for the past several days, the Dow Jones rarely shows market leadership for an extended period of time because it simply lacks the type of growth stocks necessary to fuel a bull market. Therefore, it was not surprising that we began to see sector rotation out of the Dow and back into the Nasdaq yesterday. If yesterday’s pattern of relative weakness in the Dow follows through for a few days, our strategy of shorting a correction in the Dow will become profitable. Due to the tight stops we have been keeping on the DIA short attempts, we were stopped out with a small loss yesterday morning. However, we re-shorted DIA (per intraday e-mail alert) when it broke below 103.65. Since the Dow began showing relative weakness yesterday, it closed below our short entry, giving us a small profit buffer going into today. Last evening’s news of finding a domestic cow with Mad Cow Disease will likely have a negative effect on McDonalds (MCD), which is a Dow component.

With yesterday’s renewed interest in the Nasdaq, keep an eye on QQQ (Nasdaq 100 Index) for a possible breakout to new highs over the next several days. QQQ has been finding huge resistance at the $36 area over the past several months and has failed to break through that price on four separate attempts. Based on yesterday’s closing price, QQQ is once again within striking distance of breaking out through the $36 level. The exact 52-week high in QQQ was $36.18, which was set on November 7. If the Nasdaq gets rolling over the next several days, there is a good chance that QQQ will break through that level and catch up with the S&P and Dow, both of which have recently been setting new 52-week highs. Each subsequent test of resistance weakens the resistance level, so odds are good that QQQ will break through on its fifth attempt. But, then again, volume is really light this week, so the breakout could fail. The horizontal line on the daily chart of QQQ below illustrates the resistance level to watch:

In addition to the Nasdaq, keep an eye on the Gold mining stocks today. The $GOX (Gold) index formed a bullish hammer candlestick after coming down to support of its 50-day moving average yesterday. There is not yet an ETF for this sector, but the usual suspects are in play: NEM, PDG, ABX.

Note that the U.S. stock markets will close early at 1:00 pm EST today, December 24, and on Friday, December 26. The markets are closed all day on December 25 for Christmas Day. The Wagner Daily will not be published on December 25, but regular publication will resume on Friday, December 26. Happy Holidays from MTG!

Today’s watch list:

Due to the decreased volume of the shortened holiday trading sessions over the next several days, there are no new plays. We do, however, have an open position in DIA short, which is listed 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 (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 (from Dec. 22) –
    shorted 103.28, covered 103.79, points = (0.51), net P/L = ($104)

    TLT long (from Dec. 22) –
    bought 87.17, sold 86.35, points = (0.82), net P/L = ($167)

Open Positions:

    DIA short (from Dec. 23) –
    shorted 103.64, new stop 103.71, target 101.10, unrealized points = + 0.21, unrealized P/L = + $44


As explained in the commentary above, DIA hit our stop in the morning, but we reshorted when DIA began showing relative weakness. We took DIA overnight and have a profit buffer going into today. TLT gapped down to open below its trigger price, so we used the MTG Opening Gap Rules to manage the position. But, TLT later broke below its 20-minute low, stopping us out.

Edited by
Deron Wagner,
Founder and President