The Wagner Daily


For the most part, the broad market took Friday’s afternoon reversal and selloff in stride as the Nasdaq promptly erased all of Friday’s losses and rallied to close at a new 52-week high. However, the Nasdaq Composite closed a few points below Friday’s intraday high, so we will see if there is enough momentum for it to push through that level today or if a double top forms. Not surprisingly, the Dow Jones Industrial Average lagged behind and barely retraced a third of Friday’s losses. The resistance of the monthly downtrend line from the January 2000 high is still intact. The S&P 500 continued its balancing act by showing more strength than the Dow, but more weakness than the Nasdaq, as it retraced approximately two-thirds of last Friday’s losses. Compared to the previous day, volume dropped 8% in the Nasdaq and 12% in the NYSE. Since the volume drop occurred on an up day, yesterday did NOT qualify as another institutional accumulation day. Nevertheless, volume was still healthy and came in above its 50-day average on both indices. Sector ETFs that closed at new 52-week highs yesterday were: SMH (Semiconductor HOLDR), HHH (Internet HOLDR), BDH (Broadband HOLDR), WMH (Wireless HOLDR).

Yesterday was a great example of the importance of being patient and waiting for actual trigger prices before entering trade setups that you are stalking. In yesterday’s Wagner Daily, we listed ONEQ (Nasdaq Composite Index) as a short setup we would enter IF it broke below a price of 82.92, which represented a break of the two-day low. However, because the Nasdaq once again showed relative strength to the other major indices, ONEQ held above that level and never dropped below 83.34. After setting an intraday low of 83.34 in the morning, the Nasdaq began showing strength and rallied to close at a new 52-week high. But, we did not realize any losses because ONEQ never sold off to our trigger price, which means we did not get short. If, on the other hand, the ONEQ short setup would have triggered by dropping below 82.92, odds are good that it would have dropped much lower because many traders undoubtedly had sell stops placed below that key pivotal level that would have technically represented the start of a reversal. Since the Nasdaq held above the low of the prior two days, the “doji star” candlestick pattern we discussed yesterday did NOT yet confirm itself as the beginning of a reversal in the Nasdaq. Below is an hourly chart of ONEQ that shows how it never dropped down to our trigger price yesterday. Notice also how the 20-MA perfectly acted as support for resumption of the uptrend:

As you can see from the chart above, the 20-period moving average on the hourly time frame is often a key level that provides support to stocks or indexes that are in uptrends. Shorter time-frame charts such as the 15 minute interval will often show that moving average support has been broken, but the more important hourly chart may show that the index or stock is still at key support. That’s why we always consult multiple chart time frames when analyzing a potential trade. You may miss seeing a key support or resistance level on one time interval, but see it easily on a different interval. Just as the 20-MA on the hourly chart acted as support for ONEQ yesterday, the 40-MA perfectly provided support for the relatively weaker SPY (S&P 500 Index). Take a look:

Although the hourly chart acted as support for the S&P 500 yesterday, one thing you may not have noticed is that the index has rallied up to major resistance of its 200-WEEK moving average, which generally acts as VERY strong resistance. 200-period moving averages always act as strong support or resistance, but if this moving average is on a WEEKLY time interval, it becomes even more powerful. The weekly chart of the S&P 500 Index below illustrates this resistance level:

It is not pictured on the chart above, but June of 2001 was the last time the S&P was above its 200-week moving average. While anything is possible in the stock market, I would personally be very surprised if the S&P busts through this level without first correcting through a price retracement, especially considering the additional resistance of the monthly downtrend line on the Dow.

Tomorrow is the first big earnings day of the week as companies such as Intel, Apple Computer, Genentech, QLogic, and Yahoo! all report earnings after the close. It will certainly be interesting to see not only how good the actual reports are, but more importantly how traders REACT to those reports. If the reports only meet expectations and the market STILL continues to rally, it would be incredibly bullish! However, as history has shown us in the past, strong broad-market rallies that precede earnings seasons usually need to have very impressive corporate reports in order to merely hold on to their gains. Therefore, the most likely scenario is that we will see “selling on the news” of companies that have been bid much higher in anticipation of positive quarterly earnings, unless they report absolutely stellar earnings. Obviously, we don’t know what the real reaction will be and we are merely discussing possible scenarios. But the point is to simply be aware and cautious if you are aggressively long right now. Shorting a strong uptrend without first having some confirmation of a reversal is akin to stepping in front of a diesel locomotive and hoping it will stop in its tracks before it reaches you. That’s a pretty risky proposition! However, we continue to feel it is equally risky to be aggressively entering new long positions at current levels, especially given the resistance of the 200-week moving average on the S&P 500 and the monthly downtrend line for the Dow Jones Industrial Average.

If you must buy the market right now, it certainly seems that the best bet is the Nasdaq, which really does not have any major resistance overhead. If you are long the Nasdaq, keep a close eye on the Semiconductor (SOX) Index, which recently began showing relative strength. As long as that sector remains strong, the Nasdaq is likely to remain strong. But, if the SOX begins to roll over, the Nasdaq is likely to go with it. Whether long or short right now, be sure to honor those stops to protect your gains and limit your losses. Remember that if you ALWAYS cut your losers quickly and let your winners ride, you can be consistently profitable, even if your accuracy rate for stock picking is low.

Today’s watch list:

SPY – SPYDERS (S&P 500 Index Tracking Stock)

Trigger = below 112.45
(below the 40-MA/60 min.)
Target = 110.60 (support of the 20-day moving average)

Stop = 113.30 (above yesterday’s close)

Notes = We will look to short SPY only if it breaks below support of its 40-MA on the hourly chart, which has been intact since December 12 (see commentary above).

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:


Open Positions:

    DIA short (full position, from Jan. 6 and Jan. 9) –
    shorted 105.27 (avg.), stop 107.55, target 100.50, unrealized points = + 0.10, unrealized P/L = + $20


The ONEQ short setup did not trigger yesterday, so our only open position remains the DIA short.

Edited by
Deron Wagner,
Founder and President