Commentary:

The broad market once again demonstrated its resiliency yesterday as each of the major indices closed higher on the day. Like January 6, the S&P 500 and Dow Jones Industrials both spent the entire day trading flat, in a narrow, sideways range, until a few buyers stepped in during the final thirty minutes of trading and pushed the indices into positive territory. The Nasdaq Composite, however, maintained the pattern we have been seeing all week and showed relative strength to the other indices, which resulted in a closing gain of just over 1% for the Nasdaq. The S&P 500 and Dow Jones Industrials lagged behind again, although both indices managed to close with gains of approximately 0.5%.

The most interesting thing about yesterday was the huge volume. The NYSE logged over 1.81 billion shares traded, which was the highest volume day since November 21, 2002, over a year ago, in which the NYSE traded 2.03 billion shares. The Nasdaq traded 2.63 billion shares, which was the highest day since June 6, 2003, a 2.94 billion share day. June 6, 2003 was a high volume selloff day, so you have to go all the way back to June of 2002 (exactly one year prior) to exceed yesterday’s volume on an up day in the Nasdaq. We have now seen two consecutive high volume days, but the S&P and Dow barely advanced during that time period. Like we said yesterday, big volume surges should be accompanied by sharp price movements higher, but the action of the past two days has resembled more of a consolidation period, with the exception of some buying into the final thirty minutes. It is my personal opinion that the huge volume of the past two days that has correlated to a minimal advance in the markets, is indicative of a short-term top. The retail public never pays much attention to volume and price correlation and, as a result, often misses the warning signs that astute traders look for. But, as we cautioned, don’t aggressively short the market until the market shows you a good reason to, such as a break below the previous day’s low. Nevertheless, it would be unwise to ignore the warning that the high volume churning action has shown us over the past two days. Again, if you are long, we strongly recommend you trail tight stops to protect any gains or minimize losses.

It was interesting that the heavily weighted Semiconductor (SOX) Index closed with a gain of more than 3%, but the Nasdaq only closed 1.1% higher. This could largely be attributed to weakness in the even heavier-weighted large-cap stocks such as MSFT, which closed with a loss. The SOX actually broke out to a new 52-week high yesterday, which was a nice recovery from the relative weakness it was showing only a few weeks ago when it was having trouble getting above its 50-day moving average. The Telecom Index (XTC), which we pointed out to you earlier in the week, broke out to another 52-week high yesterday, especially the wireless subsector. The Oil Service Index (OSX) was also strong yesterday, and made up the losses of the prior two days. We had the right idea to be long OIH (Oil Service HOLDR), but it looks like our stop was about 5 cents too tight. That happens sometimes, but you just move on to the next trade.

Did you notice that the U.S Home Builder Index ($DJUSHB) cracked hard yesterday? We have been shorting this sector ever since it formed a head and shoulders pattern that we first brought to your attention last week, and it finally broke below the neckline yesterday. Ryland (RYL) was the weakest in the group and dropped a whopping 10 points (12%) after they reported an 8% drop in new orders for the quarter. Most other stocks in the sector closed sharply lower as well. Congrats to those of you who took our advice and shorted the sector due to the head and shoulders pattern. The daily chart of the Home Builder Index below illustrates yesterday’s break of the neckline, which now gives us a projected target of just over 500 on the index:

Remember that next week kicks off corporate earnings season, so that is likely to be the focus of the market in the coming week and even today, as traders speculate over next week’s reports. As we mentioned before, the market seems to have priced in some pretty lofty expectations for earnings, so anything less than stellar is likely to cause weakness in the market. We’ll have a better idea, though, once we see how the market reacts to the first major report next week.

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Today’s watch list:

IWM – iShares Russell 2000 Small Cap Index
Short

Trigger = below 114.38
(below yesterday’s low and the January 6 high)
Target = 110.30 (support of the 20-day moving average)

Stop = 115.85 (above yesterday’s high)

Notes = Shorting a break of yesterday’s low will confirm the reversal of yesterday’s doji star candlestick formation. But, we will only short if yesterday’s low is broken.

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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:

DIA short (HALF position, from Jan. 6) –
shorted 105.20, stop 107.55, target 100.50, unrealized points = (0.81), unrealized P/L = ($81)

Notes:

The HHH short setup, which was e-mailed to Wagner Daily subscribers via intraday alert, did not trigger. Therefore, our only open position remains the intermediate-term DIA short (half position).

Edited by
Deron Wagner,
MTG
Founder and President