The Wagner Daily | January 14, 2004

Commentary:

Nervousness about the upcoming batch of corporate earnings in the latter half of this week gave traders a good excuse to sell yesterday and lock in gains on many long positions that have gotten ahead of themselves. Yesterday began with some of the heaviest selling the major indices have seen in several weeks, although the broad market stabilized and reversed some of its intraday losses during the final hour of trading. The major indices began the day with a minor opening gap down, but trended sharply lower throughout the entire morning session. By 12 noon EST, the S&P 500 Index, Dow Jones Industrial Average, and even the Nasdaq Composite had each broken below support of their respective previous day’s lows. The major indices bounced only slightly during the mid-day doldrums, then sold off again to test their prior intraday lows. Buyers stepped in on the retest of the lows, causing an intraday double bottom to be formed, which eventually enabled the major indices to recover more than a third of their intraday losses. The S&P 500 Index closed 0.5% lower, the Dow Jones closed 0.6% lower, and the Nasdaq Composite lost 0.7%. Interestingly, all three of the major indices showed equal weakness yesterday. This was a change of pace for the Nasdaq, which had formerly been ignoring the relative weakness in both the S&P and Dow in recent days.

It looks like the high volume “churning” action we discussed at the end of last week accurately predicted yesterday’s correction. Last week’s huge volume increases in the NYSE, with minimal corresponding price gains, gave us a warning that the market may have been nearing a short-term top. Volume is one of the best technical indicators because it never lies and is also one of the only indicators that leads the market instead of lagging it. Most of the time, there is a lag of several days until the price action of the market catches up and actually reflects any bullish or bearish volume patterns. Yesterday’s correction after last week’s “churning” was a good example of this. While naive retail investors base their decisions merely on price, astute subscribers to The Wagner Daily realize that careful daily analysis of the market’s volume patterns is equally, if not more important, than price alone. With that being said, yesterday was technically a bearish “distribution day” because volume increased over the previous day in both the NYSE and Nasdaq, but prices closed lower across the board. When the broad market closes with losses AND on higher volume than the previous day, this tells us that the selling was “real” and was likely marked by institutional distribution. One distribution day during the course of a strong rally is not a big deal, but it is important to watch for a series of these.

Looking at an hourly chart of SPY (S&P 500 Index), you will notice that SPY broke and closed below support of its 40-period moving average for the first time in over a month. This support level, which we looked at yesterday morning, had formerly been intact since December 11. In addition, the 20-period MA is now rolling over to meet the 40-period MA. The convergence of these two moving averages should now act as overhead resistance because prior support becomes the new resistance once the support is broken. The hourly chart of SPY below illustrates this convergence, which is at 112.73 and correlates to a level of 1124 on the S&P 500 Index:

The Nasdaq Composite broke below support of its 20-MA on the hourly chart, but continues to show slight relative strength and is now holding at its 40-MA on the same time frame. The Nasdaq Composite has bounced off support of the 2075 – 2080 level four times over the past four days, so that is obviously a key support level to keep an eye on today. The Dow Jones closed below support of the prior two days’ lows yesterday, but perfectly bounced off support of its 20-day moving average. We anticipate it to re-test the 20-day MA in the coming days, which would benefit our short position in DIA.

If the major indices are going to see a decent correction (there is no guarantee they will), this is the place where it is likely to happen. From an intermediate-term basis, the most important technical elements that could cause such a correction are resistance of both the 200-week moving average on the S&P 500 Index and the primary monthly downtrend line on the Dow Jones Industrial Average, both of which we have discussed and illustrated several times over the past week. Important corporate earnings reports will begin to be released after today’s close (INTC, AAPL, DNA, YHOO, and QLGC) and will continue for the next several weeks. Historically, high expectations that are only met, but not exceeded, has often served as an excuse for a market correction as well. Either way, you may want to reduce your overnight holdings until some of the earnings reports have been digested by the market in the coming days.

Today’s watch list:

(Due to the slew of corporate earnings after the close today, there are no new swing trade entries we are targeting for today. However, you may want to keep an eye on PPH (Pharmaceutical HOLDR), which may reverse and rally over the next few days.)

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 = + $154

SPY short (from Jan. 13) –
shorted 112.46, stop 113.30, target 110.60, unrealized points = (0.10), unrealized P/L = ($20)

Notes:

The SPY short triggered per yesterday’s Wagner Daily, and we also remain short DIA.

Edited by
Deron Wagner,
MTG
Founder and President