The Wagner Daily | February 11, 2004

Commentary:

Each of the major indices followed up Monday’s lethargic session with minor gains yesterday, but the broad market continued its recent pattern of declining volume. Like the previous day, the broad market was choppy and the range was relatively narrow, making it less than ideal for aggressive intraday trend trading. The S&P 500 and Nasdaq Composite both trended higher throughout the first half of the session, but sellers took control around 2:00 pm EST and caused each of the major indices to give back approximately two-thirds of their intraday gains. The broad market rallied a bit during the final thirty minutes of trading, but there was not enough momentum to push the broad market back to its mid-day highs. The Dow Jones Industrial Average showed the most relative weakness and closed only 0.3% higher and below resistance of the previous day’s high. The S&P 500 Index closed one point above the previous day’s high, with a gain of 0.5%. The Nasdaq closed 0.7% higher on the day, but half of that gain occurred during the last fifteen minutes of trading. A closing surge of buyers in the Russell 2000 Small Cap Index seemed to be largely responsible for the Nasdaq’s spike. The Russell 2000 outpaced all the major indices and closed 1.3% higher.

Although the Nasdaq Composite gained 0.7% yesterday, volume declined for the fourth consecutive day. Furthermore, yesterday’s volume in the Nasdaq was the lightest day of 2004. The Nasdaq has closed higher in three out of the last four trading sessions, but each of those days have been on lighter volume than the previous day. When you consider that four out of the last six down days have conversely been on higher volume, it points to the fact that
institutions are selling on the down days, but standing primarly on the sidelines during the up days. Obviously, this is the exact opposite pattern you want to see in a bull market. Volume in the NYSE actually increased 7% yesterday, which made the picture a little brighter, but the S&P and Dow didn’t exactly put in an impressive performance yesterday either. While the overall price action in the major indices has not been overly bearish, it’s the recent pattern of low volume rally days and higher volume down days that is causing us to err slightly to the bearish side. Remember that volume is one of the only market internals that never lies! Unlike many technical analysis tools, volume is also a leading indicator, rather than a lagging indicator. While the average retail investor bases decisions on price alone, a constant focus on the price to volume relationship in the broad market enables you to really see what is happening beneath the surface.

Both the S&P 500 Index and Dow Jones Industrial Average are now back above their 20-day moving averages. Since the 20-day MA acted as resistance on these indices last week, the 20-day MA should now be the new support level fo the S&P and Dow. On the Dow, the 20-day MA is at 10,549 (105.69 for DIA), which is just below the low of the past two days. As mentioned in yesterday’s newsletter, we would not be heavily short the Dow (DIA) unless the index breaks back below this level. As for resistance, watch yesterday’s high of 10,626 (106.56 on DIA). Beyond that, the next major resistance is the prior 52-week high of 10,705 (107.23 on DIA), which was set on January 26.

The S&P 500 Index has a similar daily chart pattern to the Dow. On the downside, watch for the 20-day MA at 1,137 (114.05 on SPY) to act as support. Also, don’t forget that the 200-week moving average is still holding firmly as support at 1,122. Resistance on the S&P is yesterday’s high of 1,147 (115.14 on SPY). Beyond that, the prior 52-week high of 1,155 (115.93 on SPY) is the next major resistance.

The Nasdaq continues to show relative weakness, and the lack of high volume buying confirms this weakness. Unlike the S&P and Dow, the Nasdaq Composite is still below its 20-day moving average, which is at 2,091. More importantly, the 200-week moving average now looms overhead as key resistance at 2,083. Since the Nasdaq closed at 2,075 yesterday, the index will test this key level if it attempts to rally only 8 points higher. Watch for an increase in volume if the Nasdaq breaks above it.

There are two notable news events to be aware of today. The first is that Comcast has proposed to merge with Disney. In the pre-market, this has caused a 14% gap up in Disney. This is important because Disney is likely to have a bullish effect on the Dow’s performance today. Also, watch for a sympathy strength in other media stocks such as VIA, TWX, and DISH. Second, we want to make you aware that Greenspan is delivering a speech on monetary policy to the House of Representatives, beginning at 10 am EST today. Market will likely be in a “wait and see” mode ahead during that meeting. Since volume has been light lately, we may see an exaggerated reaction to any surprise comments during that presentation.

Today’s watch list:

(There are no new plays today due to Greenspan testimony to the House. However, we will send e-mail alert when/if we enter any new ETF swing trades. In general, we continue to like the banks and broker/dealers on the short side. Oil Service and Biotechs look good on the long side.)

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 = ($6)

Notes:

We shorted HHH yesterday, per the newsletter. DIA short did not hit its trigger price for entry yesterday.

Edited by
Deron Wagner,
MTG
Founder and President