The Wagner Daily | February 6, 2004

Commentary:

The major indices began the day with a small opening gap up yesterday morning, but moderate selling pressure quickly pushed the S&P 500 and Nasdaq Composite down to their respective lows of the previous day. The broad market held at support of its previous day’s lows and formed a double bottom that enabled a rally to occur just after 1 pm EST. The rally caused both the S&P 500 and Dow Jones Industrial Average to break above their morning highs, but the Nasdaq Composite lagged slightly behind and formed an intraday double top. This divergence eventually caused the rally attempt to fizzle out and each of the major indices closed in the middle of their narrow intraday ranges. Overall, it was an indecisive and choppy day with not much committment in either direction. Each of the major indices closed approximately 0.2% higher, but on lighter overall volume. NYSE volume was 3.6% lower than the previous day, while volume in the Nasdaq dropped 14%. Obviously, it would have been more bullish if volume had increased on a day when each of the indices closed higher. Nevertheless, breadth was slightly positive, as advancing volume outpaced declining volume by 1.38 to 1 in the NYSE and 1.16 to 1 in the Nasdaq.

Because the S&P 500 Index held support of its previous day’s low yesterday, key support of the 200-week moving average remains just a few points below. Yesterday’s low in the S&P 500 was 1124.4, which was exactly one point higher than the current price of the 200-week MA. This is not coincidence because this level is being closely watched by many professional traders. Without a doubt, there are many sell stop orders that could trigger a sharp decline if the 1123 level is violated. But, as long as the index holds above that level, it will act as support that attracts buyers who may dip a toe in the water on the long side. On the upside, resistance of the 20-day MA is now at 1134, which converges with the high of February 4. Going into today, many traders will also be watching the 1131 level, which is where the S&P 500 Index closed last week. Any closing price below that would represent the second consecutive week of losses in the index. So, watch 1123 – 1124 area as support today, while 1131 – 1134 will act as resistance. The weekly chart of the S&P 500 Index below illustrates this week’s tight range just above the 200-week MA:

The Nasdaq Composite closed on support of its closely-watched 50-day moving average for the second consecutive day. Both yesterday’s closing price and the 50-day moving average are at 2019. In yesterday’s newsletter, we also illustrated how the 50-day MA converges perfectly with support of the primary uptrend line from the low of March 2003. Therefore, just like the S&P 500 Index, the Nasdaq is sitting at a pivotal “make it or break it” level. Watch yesterday’s intraday low of 2012 as support and the February 4 high of 2044 as resistance.

The daily chart of the Dow Jones Industrial Average is looking quite interesting. For the past six trading days, the Dow has remained in a tight 70-point range and has been consolidating just below its 20-day moving average. Due to its inability to rally after the January 28 selloff, this consolidation in the lower end of the range should lead to new lows very soon. But, at the same time, the Dow has been showing relative strength to the Nasdaq and therefore may be the first of the major indices to rally. Either way, extended volatility contractions usually lead to a big move in one direction or the other, so be prepared. We have highlighted this volatility contraction on the daily chart of the Dow below:

Yesterday’s individual sector watchlist worked out perfectly because the Broker-Dealer Index ($XBD), which we mentioned for short sale possibilities, was one of the weakest indexes, along with Banking ($BKX). As anticipated, both the Internet Index ($GIN) and Gold and Silver Mining Index ($XAU.X) showed strength. We expect more follow-through in the same direction today. Also keep an eye on the Hardware and Semiconductor indexes, both of which showed signs of life yesterday. A complete list of commonly-traded sector ETFs can be found at holdrs.com. The Chinese Hang Seng Index continues to show great relative strength, so keep an eye on EWH (Japan Fund ETF), as well as individual Chinese stocks. SNP is one in particular we like at current price levels.

Because of the recent volatility contraction and key tests of support in both the S&P 500 and Nasdaq, we feel that tight stops are crucial right now on both the long AND short side of the broad market. Don’t fall in love with either side right now, stay alert, and be willing to change your opinion at a moment’s notice. As you know, the market can and will do anything, whether it makes sense to you or not. As always, remember to trade what you see, not what you think!

Today’s watch list:

Since we currently have three open positions, there are no new plays for today. We will re-assess the market conditions on Monday and consider new trade entries for next week.

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:

net P/L = + $79

DIA short (HALF position, from Jan. 6 and Jan. 9) –
shorted 105.27 (avg.), covered 105.25, points = + 0.02, net P/L = + $1

Open Positions:

unrealized P/L = + $73

SPY short (HALF position, from Feb. 5) –
shorted 113.10, new stop 113.75, target 110.90, unrealized points = (0.08), unrealized P/L = ($8)

DIA short (HALF position, from Feb. 5) –
shorted 105.03, new stop 105.61, target 103.20, unrealized points = (0.10), unrealized P/L = ($10)

Notes:

The existing SPY and DIA short positions hit their trailing stops yesterday afternoon. However, per intraday e-mail alert, we re-shorted only HALF position size of both SPY and DIA later in the afternoon after we noticed the broad market rally failed. We only re-shorted with half position size in order to reduce risk, and we also have a very positive risk-reward ratio. If we’re wrong, our losses will be minimal (about 60 cents on each trade). If we’re right, we can net several points on a breakdown to the 50-day MAs. Remember to use the MTG Opening Gap Rules to re-adjust the stops to over the 20-minute high if SPY or DIA gap up above our stops. We remain short IWM from our original entry on February 4.

Edited by
Deron Wagner,
MTG
Founder and President