The Wagner Daily | December 29, 2003

Commentary:

The S&P 500 and Nasdaq Composite both started out strong last Friday morning and briefly traded at new highs for the week, but total market volume was too light to sustain the momentum and they both drifted lower during the final hour of Friday’s shortened trading session. The Dow Jones Industrials lagged behind both the S&P and Nasdaq because it was the only one of the three major indices that did not probe to a new high for the week during the morning. Interestingly, the S&P 500, Dow Jones Industrials, and Nasdaq each closed 0.2% higher, but in the middle of their respective ranges of the previous day. Much like December 23 and 24, it was a rather dull and uneventful day for intraday trading, which is usually the norm for holiday-shortened sessions.

At just over 350 million shares, last Friday was the lightest volume day of the year for the NYSE, including all other previous half-day sessions. The Nasdaq traded just over 500 million shares and was proportionately just as light. Since it was the day after Christmas and also a Friday, the extremely low volume was not a surprise. While volume will probably increase a bit this week, the markets are closed for the New Year’s Day holiday on Thursday, so we probably will not see the return of big institutional money until next Monday, January 5. This means we will continue to tread lightly on both sides of the market because we cannot expect much follow-through in either direction when volume is so light. Remember that volume is the fuel that drives both rallies and selloffs. Without it, the markets are usually prone to an abundance of both false breakouts and breakdowns that can easily chop up your trading account if you attempt to buy or short them. We won’t really know the direction of the market’s next major move until after the “big money” returns next Monday.

While doing research over the weekend, a daily chart of the Semiconductor ($SOX) index caught our attention. For the first time since March, the 20-day moving average has converged with the 50-day moving average and the index closed fractionally below this convergence after trading in a narrow range on Friday. The daily chart of the SOX index below illustrates this:

The daily chart of the SOX tells us that the index is poised to either rally sharply and break through this moving average convergence or is poised to roll over and sell off to the prior lows due to this overhead resistance. Given the anticipated light volume of the coming week, it is difficult to predict which of these two scenarios will occur, but keep an eye on the index either way because SMH (Semiconductor HOLDR) may be in play either on the long or short side. It is also important to pay close attention to the Semiconductors because the SOX usually leads the Nasdaq due to the sector’s heavy weighting. By tracking the price movement of the SOX, you can increase your accuracy at predicting the direction of the Nasdaq. Speaking of which, the daily chart of QQQ (Nasdaq 100 Index) is also looking quite interesting. Take a look:

As you can see from the chart above, the $36 area has clearly been a “line in the sand” that has stopped numerous rally attempts in QQQ during the past several months. However, the resistance of $36 keeps weakening with each subsequent test because sellers are being absorbed. Therefore, it is becoming more likely that QQQ will soon break out to new highs. The absolute high for QQQ is 36.18, which was set on December 3. So, if QQQ clears that price and holds above it, we feel it would be relatively low-risk to buy QQQ. However, the caveat is that volume is likely to be low this week, so we will not have the volume confirmation we like to see in order to buy breakouts. Nevertheless, you can watch the SOX index as confirmation. If QQQ tries to break out, but the SOX stays weak and below its moving average convergence, we would not trust the QQQ break out. If, on the other hand, the SOX confirms the move, the odds of a successful break out will increase.

Finally, we hope some of you took advantage of the strength in the Gold Index ($GOX) over the past few days, which we brought to your attention last Wednesday after it bounced off its 50-day moving average. Since then, it has climbed steadily higher and has netted us a 4% gain in leading gold stock Placer Dome (PDG), which we called for a long entry last week in the Intraday Real Time Room. There is not yet an ETF for the gold mining stocks, but NEM, ABX, and PDG are three of the leaders we usually trade.

Today’s watch list:

SMH – Semiconductor HOLDR
Long

Trigger = above 41.50
(above the 50-day MA)
Target = 43.35 (retest of Dec. 4 high)

Stop = 40.85 (below Friday’s close)

Notes = SMH is the ETF that most closely follow the Semiconductor (SOX) index. See commentary above for current analysis of the SOX index.

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:

(none)

Open Positions:

unrealized P/L = + $74

Notes:

We remain short DIA with a stop that has been lowered to the break-even area, which now removes the risk from the trade. In the event of an opening gap up above the stop price, we will use the MTG Opening Gap Rules to manage the position. This means that we will wait for a break of the opening 20-minute high before covering the position.

Edited by
Deron Wagner,
MTG
Founder and President