The Wagner Daily


Despite the fact that each of the major indices closed within 0.1% of the flat line, yesterday was one of the most volatile days we have seen in a long time. Spurred by a negative reaction to several earnings reports that were released the previous evening, the Nasdaq Composite began the day with an opening gap down, sold off to below the previous day’s low, rallied above the previous day’s high, then sold off again and closed 0.1% lower than the previous day. If you missed yesterday’s intraday price action and only looked at yesterday’s closing price of the Nasdaq, you might have assumed it was a flat and narrow-range day, but that was certainly not the case. At its morning intraday lows, the Nasdaq Composite was down as much as 1.1% from the close, but then reversed sharply to a 0.5% GAIN, then reversed one more time to close with a 0.1% loss. Once again, the Nasdaq showed relative weakness to both the S&P and Dow Jones, both of which barely dropped when the Nasdaq sold off and broke the previous day’s low. Due in part to a positive reaction from IBM’s quarterly earnings, the S&P 500 and Dow Jones Industrial Average showed similar volatility to the Nasdaq, but both closed with a 0.1% gain. If you are a day trader who prefers to take small profits quickly, yesterday was your kind of day. But, for trend traders such as myself, it was very difficult to stay with any position for more than an hour or so because the market was so indecisive and erratic throughout the day.

Volume came in 10% higher than the previous day in the NYSE and 3% higher in the Nasdaq. Since the Nasdaq closed lower on the day, it was technically a “distribution day,” but it is probably not very accurate to call it that because most of the volume occurred during the Nasdaq’s intraday rally. More importantly, it was another day of high volume in the broad market, but without corresponding price gains. In other words, the market was “churning” for the fourth time in two weeks. Further confirming the “churning” action, advancing volume was on par with declining volume in both the NYSE and Nasdaq yesterday. This is similar to how the market acted when the October 2002 lows were formed in the major indices and this type of action often precedes a major market reversal. But, so far, the price is NOT yet confirming that the market is ready to reverse. But, you would be unwise to ignore the warning of the market’s recent pattern of high volume “churning” and indecisive intraday action over the past two weeks.

Taking a look at sectors, several of the “old economy” sectors began showing a lot of weakness yesterday. The Gold Index ($GOX) broke below its primary uptrend line and its 50-day moving average. If you are long gold or silver mining stocks, you may want to consider selling into the next bounce because you can always re-enter when/if the chart begins to stabilize. Oil Service ($OSX) and Utilities ($DJU) both showed weakness yesterday as well. Internets ($GIN) and Telecoms ($XTC) continued their recent strength yesterday, while the Biotech sector ($BTK) tested resistance of a new 52-week high.

Looking at the daily charts, the major indices are all consolidating near their respective 52-week highs. This pattern generally is bullish and leads to new highs. However, most of the indices formed “doji star” candlesticks yesterday, which do not necessarily mean the market will reverse, but is often a warning sign that it may, especially when combined with the volume patterns we have been discussing. The weekly chart of the S&P 500 Index still shows resistance of the 200-week MA that we looked at earlier in the week, but the S&P is holding firm and trying to break through it. The weekly chart of the SOX (Semiconductor) Index is also nearing its 200-week moving average. In addition, the Dow Jones is still below its primary monthly downtrend line from the January 2000 high, but is getting close to breaking it. Based on the 200-week MA on the S&P and the primary monthly downtrend line on the Dow, we remain mostly neutral right now. It seems the market does not want to correct, so we don’t want to be aggressively short, but I also cannot justify the risk of aggressively entering new long positions in the broad market at current levels UNLESS the Dow and S&P both break through the resistance levels we discussed. Note that today is monthly options expiration day, so expect volatility to continue, especially in the afternoon. Earnings from General Electric will be released before today’s open and many big reports will be released next week as well.

Note that the U.S. equity markets will be closed on Monday, January 19 in honor of Martin Luther King Day. Therefore, The Wagner Daily will not be published on Monday, but regular publication will resume on Tuesday, January 20.

Today’s watch list:

There are no new plays for today.

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:

    PPH long (from Jan. 15) –
    bought 80.20, sold 80.11, points = (0.09), net P/L = ($5)

Open Positions:

    DIA short (full position, from Jan. 6 and Jan. 9) –
    shorted 105.27 (avg.), stop 107.55, target 100.50, unrealized points = (0.69), unrealized P/L = ($138)


We bought PPH yesterday, but made a judgement call to close the position an hour later based on the indecisiveness of the market yesterday. We remain short DIA.

Edited by
Deron Wagner,
Founder and President