The Wagner Daily | January 23, 2004

Commentary:

For the first time in over a month (since December 15), the Nasdaq Composite Index closed with a loss of more than 1% yesterday, as it gave back 1.1% on volume that was 3% lighter than the previous day. Both the S&P 500 and Dow Jones Industrial Average once again showed relative strength to the Nasdaq, as the Dow closed flat and the S&P 500 closed only 0.3% lower. Volume on the NYSE was 4.9% lighter. By technical definition, yesterday was a downtrending day in both the S&P and Nasdaq because it was marked by a series of lower highs and lower lows. However, it was clear that the indecision which has made the Nasdaq so choppy over the past several days was still present.

We have a lot of charts to show you in today’s Wagner Daily, so let’s begin with a 5-minute intraday chart of QQQ (Nasdaq 100 Index) that illustrates the choppy and indecisive nature of yesterday’s downtrend. Although the Nasdaq maintained a downtrend and closed at the low of the day, notice how much the index retraced when it bounced. For intraday trend traders who were trading the broad market, this mandated either using loose stops on short positions or taking profits quicker than usual. Take a look:

The Semiconductor ($SOX) Index was once again largely the cause of yesterday’s weakness in the Nasdaq. As we have mentioned many times in the past, the Nasdaq typically follows the direction of the SOX, which closed 1.5% lower yesterday. One thing we found very interesting is that this week’s high in the SOX index was perfectly marked by resistance of its 200-week moving average, which we pointed out to you earlier in the week. The weekly chart of the SOX index below illustrates how the 200-week moving average stopped the rally dead in its tracks, right at the 557 area:

Looking at the daily time frame of the Semiconductor Index, you will notice that the index has dropped to a key support level that it will test today. The SOX closed at 532 yesterday, which is the same level that formerly marked resistance of a double top from last November. One basic tenet of technical analysis states that a prior resistanace level will become the new support level once that resistance is broken. Therefore, if the SOX closes today below yesterday’s low, it will have broken below a key support level which could also point to the beginning of a correction in the Nasdaq. However, given the recent resilience of the market, it would not surprise us if the SOX found support here. The horizontal line on the daily chart of the SOX index illustrates how the prior resistance should now act as support:

While neither the S&P 500 nor the Dow Jones have given us clear reversal signals on their daily charts, the Nasdaq picture is looking more bearish. The 2110 to 2120 level is a key support area for the Nasdaq Composite. In addition to horizontal price support on the daily chart, the 2113 level marks the 200-WEEK moving average on the Nasdaq Composite. Therefore, if the Nasdaq breaks below 2110, odds are pretty good that it will quickly drop at least to its 20-day MA, which is currently at 2064. Below that, the next major support level is all the way down at 2000. If you wish to take advantage of shorting the Nasdaq, you may consider shorting ONEQ, which tracks the Nasdaq Composite Index. QQQ is another ETF option, although it tracks the Nasdaq 100 Index instead. Below is the daily chart of the Nasdaq Composite (consult a weekly to see the 200-week MA):

As we mentioned yesterday, the S&P 500 Index has closed higher for the past eight consecutive weeks. In order to turn that winning streak into nine weeks, the S&P 500 needs to close above 1139. Since it closed just under 1144 yesterday, a drop of more than 5 points in the S&P today would mark the end of the weekly winning streak. But, keep in mind that the 200-week MA is now at 1127 and is likely to act as support. The Dow Jones Industrial Average is also going for its ninth consecutive week of gains, but needs to close today above 10,600 in order to do so. Therefore, a drop of more than 23 points in the Dow today would spell an end of the eight-week winning streak. While there is not yet enough confirmation that the broad market is going to correct, the recent weakness in both the SOX and Nasdaq is a warning sign. Today’s performance is key because it will determine whether or not the S&P and Dow can maintain their weekly winning streaks. If not, there’s a good chance we will see some bears come out of hibernation next week, at least in the short-term. As we mentioned two weeks ago, there needs to be an impetus to keep the market propped up after earnings season has concluded. If not, it becomes a prime excuse for a correction. We recommend you mark these key price levels we discussed today because the weekly time frame is more important and holds more weight than the daily.

Today’s watch list:

MDY – S&P 600 Mid-cap SPYDER
Short

Trigger = below 109.39 (below yesterday’s low)
Target = 107.10 (support of the 20-day MA)

Stop = 110.55 (above yesterday’s resistance)

Notes = MDY began showing the first signs of rel. weakness yesterday and we feel it is the start of a multi-point correction down to its 20-day MA. We therefore will short MDY on a break of yesterday’s low.

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:

unrealized P/L = ($140)

Open Positions:

unrealized P/L = + $65

DIA short (full position, from Jan. 6 and Jan. 9) –
shorted 105.27 (avg.), stop 107.55, target 100.50, unrealized points = (1.15), unrealized P/L = ($230)

Notes:

IWM gapped up above our initial stop yesterday morning, but we used the MTG Opening Gap Rules to set a new stop just over the 20-minute high, which was never violated. Based on IWM’s relative weakness yesterday, there’s a good chance the opening gap marked the short-term top on IWM. Therefore, we remain short with an adjusted target of 114.50 and new stop of 119.85. HHH also gapped up above our stop due to strong earnings report from EBAY. We used the gap rules to adjust the stop, but a rally in the afternoon caused HHH to hit our adjusted stop as well. Finally, we remain short DIA, per the resistance of the monthly downtrend line from the January 2000 high.

Edited by
Deron Wagner,
MTG
Founder and President