The Wagner Daily | February 18, 2004

Commentary:

The broad market began the week on a positive note yesterday, as each of the major indices turned in respectable gains. The S&P 500 Index gained 1.0%, the Dow Jones Industrial Average gained 0.8%, and the Nasdaq Composite Index tacked on 1.3% yesterday. Unfortunately for intraday traders, 80% of yesterday’s gain in the S&P 500 was the result of a large opening gap up in the S&P futures, after which the index grinded higher in a very narrow range throughout the rest of the day. Similarly, 55% of the gain in the Nasdaq was the result of an opening gap higher. This was good if you were already long from over the weekend, but provided minimal opportunity for low-risk intraday entries on the long side of the broad market ETFs.

Despite the 1.3% gain in the Nasdaq Composite yesterday, the 20-day moving average once again acted perfectly as resistance on the index. On the daily chart of the Nasdaq below, notice how the index was once again unable to penetrate the 20-day MA:

The primary reason the Nasdaq has been unable to break above the 20-day MA is that volume on the upside remains light. Yesterday’s volume in the Nasdaq came in 11% lighter than last Friday’s already lazy session. In fact, yesterday was the lightest volume day of the year in the Nasdaq! This means that volume failed to confirm yesterday’s gains in the Nasdaq, since it would have been much more bullish to see a corresponding increase in volume to match the 1.3% price gain. The price-volume relationship in the NYSE was a little better, since volume increased by 5% in the NYSE. However, fully 100% of the additional increase in volume was the result of the volume surge in AT&T Wireless, which traded 109 million more shares than it did on Friday. Therefore, it is safe to say we are still not seeing a confirmed return of institutional money into the markets. February 11 was the only “accumulation day” we have seen in several weeks, although we have seen several bearish “distribution days” during the same time period.

Yesterday’s bullish price action (volume notwithstanding) was a good example of why we mentioned that the potential double top in both the S&P 500 Index and Dow Jones Industrial Average was not yet confirmed. Despite selling off for the two days following the February 11 rally, those two days were both on lighter volume. Yesterday’s small increase in the NYSE volume made it easy for the S&P and Dow to both rally back up to test the February 11 highs. Confirmation of the double top never occurred because the 20-day moving averages on both the S&P and Dow have remained intact. Both the S&P 500 Index and Dow Jones Industrial Average tested their respective highs of February 11, and therefore their 52-week highs, during yesterday’s session. Therefore, today is likely to be a critical day that will determine whether or not the S&P and Dow will once again break out to new 52-week highs. Below are daily charts that illustrate the key price levels to watch as resistance on both of these indices:

As you can see, resistance of the 52-week high on the S&P 500 Index is at the 1,159 area, which, as you know, also converges with the 50% Fibonacci retracement from the January 2000 high down to the October 2002 low. This equates to the 116.40 area on the SPY. The key resistance to watch on the Dow is around 10,746, which is 107.80 area on DIA. Most importantly, continue to watch the relationship between price and volume because volume never lies!

Today’s watch list:

There are no new plays for today; however, we may add to the existing half position of DIA short if market conditions warrant.

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 = + $40

Open Positions:

unrealized P/L = ($7)

Notes:

IWM hit our trailing stop yesterday, enabling us to lock in a small gain. Per intraday e-mail alert, we also shorted a HALF position of DIA before the close yesterday, due to a very positive risk/reward ratio at current levels. Note that we are only short HALF position as of now, but will add to the position upon further confirmation of weakness in the index.

Edited by
Deron Wagner,
MTG
Founder and President