The Wagner Daily | January 28, 2004

Commentary:

The broad market suffered a case of amnesia yesterday, as the major indices apparently forgot about the sharp rally that occurred the previous day and gave back all of its gains only one day later. But, if you consider how light the volume was during Monday’s rally, it should not have been surprising to see the gains quickly evaporated. As we mentioned in yesterday’s newsletter, the problem with light volume rally days is that they cannot be trusted. When indices rally on light volume, it is usually attributed more to a lack of sellers rather than an abundance of buyers. The problem is that it only takes a slight increase in the number of sellers the next day in order to erase all the gains, which is why we did not trust buying Monday’s breakout to new 52-week highs in the major indices. Rather than chopping around in an erratic nature, each of the major indices trended lower in a smooth intraday fashion yesterday and eventually closed at their lows. The S&P 500 and Dow Jones each closed approximately 1.0% lower, but the Nasdaq Composite once again showed the most relative weakness and closed with a loss of 1.8%. Breadth was the most negative we have seen in weeks, as declining volume outpaced advancing volume by a margin of 3 to 1 in the Nasdaq and 1.55 to 1 in the NYSE. Just as important, total market volume increased by 13% in both the NYSE and Nasdaq yesterday, but each of the major indices closed with losses. This means that yesterday was technically a “distribution day,” which is a bearish day that occurs when the major indices close lower than the previous day, but on higher volume. One distribution day certainly does not mean the market has formed a top, but it is a great warning sign to be aware of. When combined with bearish chart patterns, distribution days can be a good confirmation tool.

Prior to yesterday, only the Semiconductor ($SOX) Index had begun showing any signs of “profit taking,” or a correction. However, yesterday’s losses were rather broad-based and caused bearish patterns to form on several sectors yesterday. The $SOX Index continued its recent weakness and closed with a significant 4.2% loss yesterday. This caused the index to clsoe just above its 50-day moving average, which is likely to provide support going into today. The Internet ($GIN) Index, which has been quite strong lately, began showing signs of a correction and lost 2.8% yesterday. Amazon.com, a large component of that index, reported earnings after the close yesterday and was trading several points lower in after-hours trading. This could cause further weakness in the Internet Index today, so keep an eye on HHH, which is the ETF that most closely tracks the leading Internet stocks. If HHH gaps down below yesterday’s low and fails to recover within the first 30 minutes of trading, you may consider shorting it and placing a stop just above the high of the day. This would provide you with a positive risk/reward ratio because HHH could fall pretty sharply if selling momentum gets behind it. Both the Biotech ($BTK) and Software ($GSO) Indexes also showed weakness yesterday and could be setting up for a multi-day correction. BBH is the ETF for biotechs and SWH tracks the software stocks.

One sector that showed a lot of strength yesterday was the Nanotech sector, which is not currently tracked by any index or ETF. Nevertheless, we have been trading individual stocks within this sector in the Intraday Real-Time Room for the past month, and have been doing quite well with them. Yesterday, we netted a gain of approximately 10% on two separate trades in NGEN and TINY. NGEN broke out of a long base of consolidation on its daily chart, while TINY reversed off its 20-day moving average. For those of you who trade individual stocks, you may want to check out some of the leading stocks in this innovative sector: NGEN, NVEC, TINY, FEIC, ALTI, NANX, and VECO. In addition to the nanotechs, the Gold and Silver Mining Index ($XAU) showed strength yesterday after forming a double bottom on its daily chart the previous day. With Gold futures holding above the $400 per ounce level, this could provide a low-risk entry point to once again begin building positions in that index. Since Silver prices continue to show relative strength to Gold, you may notice that the Silver mining stocks look technically better than the Gold miners at this point. There is not an ETF for this index, but consider individual stocks such as SWC, PAAS, and AEM. Those of you who have been waiting for the domestic launch of the Gold ETF may also want to read an article that we found on the Internet last night.

Yesterday’s weakness in the Nasdaq caused QQQ to close right at support of its 20-day moving average. If QQQ breaks yesterday’s low, it could enter into a multi-day correction due to a break of price support AND the 20-day moving average. The daily chart of QQQ below illustrates the horizontal shelf of price support and the 20-day MA that QQQ will test today:

Although QQQ is testing its 20-day MA, be aware that both SPY (S&P 500 Index) and DIA (Dow Jones Industrial Average) are still above their 20-day MAs and remain in a trading range. Therefore, don’t get to aggressive on the short side unless both SPY and DIA begin to follow suit and sell off down to their 20-day MAs as well. In addition to QQQ, two other charts I found interesting are the hourly (60-minute) charts of both IWM (Russell 2000 Small Cap Index) and MDY (S&P 600 Mid-Cap Index). Specifically, I noticed that MDY closed below its 40-period moving average yesterday for the first time since December 17! Similarly, IWM closed below its 40-MA for the first time since December 31. Both MDY and IWM have traded below their 40-MAs on an intraday basis, but yesterday was the first time both CLOSED below that level in a long time. Of course, one day below a moving average does not mean the trend is broken, but it should definitely serve as a warning sign to those who are long and may also interest those of you who like to short these ETFs. We have circled the break of the 40-MA on the hourly charts of both MDY and IWM below:

As you probably know, Greenspan and company are meeting today to discuss the Feds’ next move on interest rates. Most economists are expecting no change in rates, but traders will be closely paying attention to the wording of any potential change in bias moving forward. As always, the decision on rates will be announced at 2:15 pm EST today. Remember it’s not what the Feds actually say that matters, but how the market reacts. Whether you are presently weighted to the long or short side, be prepared for potentially whippy action after 2:15 pm today. With earnings season wrapping up within the next week, and the FOMC meeting today, there may not be much for the market to get excited about after January concludes. But, we’ll continue to just trade what we see, not what we think.

Today’s watch list:

MDY – S&P 600 Mid-cap SPYDER
Short

Trigger = below 109.35 (below yesterday’s low)
Target = 107.80 (20-day MA support)

Stop = 110.06 (above the hourly MA convergence)

Notes = See comments on MDY above regarding break of the hourly trendline for first time in over a month.

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:

unrealized P/L = + $33

DIA short (full position, from Jan. 6 and Jan. 9) –
shorted 105.27 (avg.), stop 107.55, target 100.50, unrealized points = (1.02), unrealized P/L = ($204)

Notes:

As we anticipated, IWM quickly sold off yesterday morning after hitting our stop in the after-hours the previous day. As such, we remain short IWM with the same stop of 119.85 and target of 114.50. We also remain short DIA with the same stop.

Edited by
Deron Wagner,
MTG
Founder and President