The Wagner Daily | February 23, 2004

Commentary:

Last Thursday’s “bearish engulfing” candlesticks that formed on daily charts of the major indices caused the broad market to follow-through to the downside with more losses on Friday. The S&P 500 Index, Nasdaq Composite, and Dow Jones Industrial Average each continued the previous afternoon’s downtrend and drifted steadily lower until buyers stepped in around 1 pm EST on Friday. This rally caused each of the major indices to briefly turn positive on the day and recover from their morning losses, which were as large as 1.1% in the Nasdaq. However, the broad market ran out of gas and saw another round of selling during the final hour of Friday’s trading. This resulted in a loss of 0.3% in the S&P 500 and 0.4% in both the Nasdaq Composite and Dow Jones Industrial Average. Total market volume dropped off a few percentage points on Friday, meaning there was a lack of heavy institutional selling. For the holiday-shortened week, the Nasdaq dropped 0.8%, while the S&P 500 and Dow Jones both lost only 0.1%.

As we have been discussing, the Nasdaq Composite continues to show relative weakness to both the S&P 500 and Dow Jones Industrials, which can be quickly confirmed by comparing both daily and weekly charts of the major indices. Looking at the longer-term weekly charts, you will notice that the Nasdaq closed lower for the FIFTH consecutive week, while both the S&P and Dow have basically been trading sideways. Last week was also the first time in several months that the Nasdaq Composite closed below support of its 10-week moving average, although not by much. Furthermore, the 200-week moving average continues to act as solid resistance on the Nasdaq. The weekly chart of the Nasdaq Composite illustrates how the 200-week moving average continues to act as resistance. Also note last week’s closing price below the 10-week MA:

Looking at the daily chart of the Nasdaq (below), you will notice that the index closed below its closely-watched 50-day moving average on Friday. It was only two weeks ago that the Nasdaq tested support of its 50-day MA, which it bounced off of on February 6. The Nasdaq Composite has recovered after testing its 50-day moving average on every occasion since the primary uptrend began in March of 2003. Will the 50-day MA once again provide support? Obviously, nobody knows for certain, but there is one important distinction between this test of the 50-day MA compared with previous ones. Unlike every previous bounce off the 50-day MA since last March, the Nasdaq formed a “lower high” this time because it was unable to rally above its prior highs that were set in January. However, we cannot yet declare the primary uptrend is over because we have not yet set a “lower low.” In order for that to occur, the Nasdaq would need to break below the February 5 low of 2,012. The daily chart of the Nasdaq below illustrates the key support and resistance levels to watch this week:

On the S&P 500 Index, the 1,160 area continues to be a “line in the sand” that is acting as solid resistance. This is not surprising because the 1,160 level, as you may recall, marks the 50% retracement level from the all-time high of March 2000 down to the October 2002 low. The 50% retracement level is always a pivotal level because it usually marks a turning point at which an index will either resume the direction of its prior trend (down in this case) or will enter into a new trend in the opposite direction. Put simply, the inability to rally above the 1,160 level on the S&P 500 is likely to result in a resumption of the primary downtrend that began with the all-time high of March 2000. The weekly chart of the S&P 500 below illustrates the primary Fibonacci retracement levels from the March 2000 high down to the October 2002 low. Notice how the 1,160 area coincides with the 50% retracement:

Based on the analysis above, you have a pretty good idea of the primary support and resistance levels to watch on the major indices today. For the S&P 500, Friday’s low of 1,139 (114.32 on SPY) should act as support, as it also converges with the 20-day moving average. If, however, the S&P breaks below that level, look for a selloff down to the 50-day MA at the 1,121 area (112.45 on SPY). Obviously, the 1,160 level (116.45 area on SPY) is key resistance (as discussed above). But, you should also expect resistance at the 1,151 area (115.60 on SPY), which marks convergence of several intraday moving averages such as the 200-MA on the 15 minute chart, and the 20 and 40-MAs on the hourly chart. Similarly, the Nasdaq Composite has convergence of several intraday moving averages at the 2,063 area and also the 20-day MA resistance at 2,071.

We feel the broad market remains at a critical “make or break” point that warrants caution when trading on EITHER side of the market right now. Until the support or resistance levels discussed above are broken, it is likely to be choppy and a bit erratic, as it will be a tug-of-war between the bulls and bears. Without confirmation, it doesn’t make much sense to be too aggressive either way. The smart play is to remain mostly in cash right now so that you will be prepared to take advantage of the markets’ next major move, whichever direction that may be.

Today’s watch list:

As we are already positioned in IWM and DIA short, there are no new setups for today. We remain short IWM with an unrealized gain of + 2.4 points and short DIA with a + 0.37 profit. New stops listed in the Daily Reality Report below.

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 = + $242

DIA short (from Feb. 20) –
shorted 106.79, stop 107.50, unrealized points = + 0.37 unrealized P/L = + $74

Notes:

We remain short IWM, but have trailed the stop a bit tighter, as noted above. We also shorted DIA on Friday morning, per intraday e-mail alert.

Edited by
Deron Wagner,
MTG
Founder and President