Commentary:

Wednesday’s Greenspan-inspired enthusiasm was short-lived, as each of the major indices retreated from their previous day’s highs. The S&P 500 Index spent all of yesterday drifiting lower, but on 15% lower volume and in a narrow, 5-point range. By the end of the day, both the S&P 500 and Dow Jones Industrial Average closed approximately 0.4% lower and had given back one-third of the previous day’s gains. Both indices closed at new 52-week highs the previous day, but closed yesterday below their respective prior 52-week highs (from January). Obviously, both indices need to hold at or above Wednesday’s closing levels in order to prevent a solid double top from forming at the prior highs from January. However, it’s much too early to determine whether or not Wednesday’s rally can be classified as a double top, especially considering that both indices retreated on lower volume yesterday.

While the S&P 500 and Dow Jones both held on to two-thirds of their gains, the Nasdaq Composite continued its recent trend of relative weakness and gave back fully 100% of the previous day’s gains. The Nasdaq Composite rallied 0.7% on Wednesday, but closed 0.8% yesterday. Although it may have been disappointing to the Nasdaq bulls, yesterday’s selloff should not have been surprising given that the Nasdaq lagged significantly behind during Wednesday’s rally. Remember that both the S&P and Dow closed at new 52-week highs on Wednesday, but the Nasdaq was still 3% below its prior highs. It also looks as if the 200-week moving average, currently at 2,083, is now acting as resistance on the Nasdaq. Like we said yesterday, it’s rare to see both the S&P and Dow set new highs without the Nasdaq in tow. Like the S&P and Dow, the one positive about yesterday’s weakness in the Nasdaq is that it occurred on lighter volume.

Let’s shift gears for a moment and take a look at the longer-term monthly chart of the S&P 500 Index, the broadest-based major index. Charts with a monthly time frame are too long of a time frame on which to base day-to-day trade decisions, but they help you keep a perspective of the “big picture” of where the markets stand in the context of a primary trend. By keeping this information in the back of your head, it can help to increase the odds that you will be able to catch major, multi-month reversals when the indices reach key pivotal levels. Of the major indices, the most interesting monthly chart is that of the S&P 500 Index. Take a look:

On the chart above, we have applied Fibonacci lines in order to measure the distance of the rally from the October 2002 low until now, in relation to the distance of the selloff from the March 2000 high down to the October 2002 low. As you can see from the chart, you will notice that the S&P has retraced EXACTLY 50% of the entire selloff. During any primary market trend, a retracement to the 50% level in the opposite direction usually acts as a turning point for resumption of the prior, longer-term trend. In this case, that would mean that the current price area of 1150 on the S&P 500 could mark a turning point in which the index could begin to resume the prior downtrend from the March 2000 high. However, if the 50% level is broken to the upside, the S&P is likely to rally to the 61.8% level before reversing. Therefore, the S&P 500 is now at a key test of resistance that warrants caution on the long side.

If you take an even longer-term look at the S&P 500 Index, you will notice that the index is well above the lower-channel support of its primary uptrend from the low of 1987. The chart below illustrates the primary uptrend line from the past 17 years:

Though the monthly chart of the S&P 500 may favor the odds of a decline from here, we are not necessarily advocating that you begin to aggressively sell short. Without a doubt, the daily trend is still “up” and it is risky to fight that trend without any clear confirmation. If, however, a double top forms at the current level AND last week’s lows eventually break, that would be the place to begin putting on longer-term short positions. Odds are good that would take at least several weeks to happen, if it even happens at all. Just wanted to show you the monthly chart to give you some food for thought. Consider taking a look at the monthly charts of both the Dow Jones and Nasdaq Composite as well. You may be surprised by what you see.

Note that the U.S.equities markets will be closed on Monday, February 16 for the President’s Day holiday. As such, there will be no publication of The Wagner Daily on Monday. Regular publication will resume on Tuesday.

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Today’s watch list:

There are no new plays ahead of the 3-day weekend. However, we remain short IWM, which we entered per intraday e-mail alert yesterday.

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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:

IWM short (from Feb. 12) –
shorted 118.46, stop 120.10, target 113.80, unrealized points = + 0.60, unrealized P/L = + $60

Notes:

We shorted IWM yesterday, per intraday e-mail alert. The TTH long setup never triggered.

Edited by
Deron Wagner,
MTG
Founder and President