The Wagner Daily | February 25, 2004

Commentary:

Yesterday was filled with indecision, as the bulls and bears seemed to be engaged in a tug-of-war. After beginning the day with a gap down, the major indices briefly sold off and broke below their respective lows of the previous day. However, the breakdown was short-lived and buyers stepped in around 10:15 am EST and caused the S&P 500 to rally up to the middle of the previous day’s range. Unfortunately for the bulls, the rally lasted not much longer than the morning selloff, and the major indices sold off in the afternoon. The selloff caused both the S&P 500 and Dow Jones Industrial Average to set new intraday lows, but the Nasdaq Composite held the morning low. A small buying program during the final hour of trading enabled both the S&P 500 and Nasdaq Composite to close in the middle of their intraday ranges. The Dow lagged behind and closed in the lower third of its intraday range. When the market closed and the volatility ended, each of the major indices had closed near the flat line, albeit with another day of losses. The S&P 500 Index closed with a loss of 0.2%, the Nasdaq lost only 0.1%, but the Dow dropped 0.4%.

In the NYSE, yesterday’s total market volume increased by 10% over the previous day, while turnover increased by 6% in the Nasdaq. Since each of the major indices closed with losses and on higher volume, yesterday was technically another “distribution day” in the markets. But, due to the broad market’s roller coaster price action, it’s difficult to determine whether most of the volume increase was related to institutional buying or selling pressure. Volume breadth came in slightly negative yesterday, so I would say that the majority of yesterday’s volume increase was on the sell side.

Regardless of whether you consider yesterday to be a day of distribution, the fact remains there have been at least six bearish “distribution days” within the past month and only one confirmed “accumulation day.” Paying close attention to the broad market’s price and volume relationship on a daily basis is one of the most important things you can do because it shows you whether the institutional money is buying or selling. Since institutional money controls approximately 80% of the stock markets, it’s never a good idea to trade in the opposite direction of the “big boys.” Institutions tend to buy or sell ahead of the crowd, but paying close attention to the price/volume relationship of the markets enables you to get early warning of changes in sentiment, just as last months series of distribution days gave us early warning of the weakness we are now seeing.

As we predicted in yesterday’s newsletter, we began to see sector rotation out of the S&P, and especially the Dow Jones, during yesterday’s session. Throughout the entire day, the Dow Jones lagged behind the Nasdaq, which is opposite of the pattern we have recently been seeing. When the broad market sold off yesterday afternoon, the Dow broke well below the prior intraday low, but the Nasdaq instead formed a double bottom. This relative weakness in the Dow should not have been surprising because the Nasdaq has already made a significant price correction during the past week, but the Dow is only now beginning to “catch up”to the weakness in the Nasdaq. The S&P is likely to follow suit as well. Below are intraday charts of yesterday’s price action that illustrate the divergence between QQQ (Nasdaq 100 Index) and DIA (Dow Jones Industrial Average):

In addition to the intraday relative weakness in the S&P and Dow, yesterday’s losses also caused both the S&P and Dow to finally close below their 20-day moving averages. The Nasdaq, of course, is well below both its 20 AND 50-day moving averages.

Yesterday was the fifth consecutive day of losses for the S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite. It was also the first time since January of 2003, before the current primary uptrend began, that the S&P 500 has chalked up five consecutive days of losses. Like we said yesterday, the sentiment definitely seems to be changing and this market correction is the first time since the uptrend began that the Nasdaq has formed a “lower low” and “lower high” on its daily chart. On the positive side, the 2,000 level in the Nasdaq held as price support for the second consecutive day. Since this prior area of price resistance is now acting as support, it may enable the Nasdaq to bounce from here. But, the problem is that the S&P and Dow are now out of sync with the Nasdaq and are just beginning to break down. Therefore, even if the Nasdaq attempts to rally, there is a good chance the S&P and Dow will drag it down. Our bias going into today is simple: we remain biased to the short side UNLESS any of the major indices rally above yesterday’s high AND on decent volume. At that point, we would become more cautious on the short side until the market bounces into further price resistance, which would enable lower risk short entries.

Today’s watch list:

Since we already have two open positions, there are no new plays for today. Instead, we will focus on micromanaging the open positions listed below for maximum profitability and minimal risk.

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 = ($94)

SPY short (from Feb. 24) –
shorted 114.13, covered 114.60, points = (0.47), net P/L = ($100)

Open Positions:

unrealized P/L = + $22

SPY short (re-entry, from Feb. 24) –
shorted 114.31, stop 115.10, target 112.60, unrealized points = (0.08), unrealized P/L = ($16)

Notes:

We shorted both DIA and SPY per yesterday’s newsletter, but we covered both positions for small losses when the broad market reversed later in the morning. We later re-shorted both DIA and SPY when they weakened in the afternoon and adjusted the stops as per above. The changes to the initial stop prices and the re-entry information was announced via intraday e-mail alert to subscribers.

Edited by
Deron Wagner,
MTG
Founder and President