The Wagner Daily | March 2, 2004

Commentary:

The major indices reversed their late morning weakness yesterday afternoon and each rallied to close with decent gains. The Nasdaq showed the most relative strength yesterday and closed with a gain of 1.4%. The S&P 500 Index and Dow Jones Industrial Average both lagged slightly behind and closed 1.0% and 0.9% respectively higher. Gains were broad-based, as nearly ever major market sector closed higher on the day. Sectors such as Utilities ($DJU), Retail ($RLX), Oil Service ($OSX), and Banking ($BKX) all closed at new 52-week highs. Semiconductors ($SOX) and Hardware ($HWI) also showed a lot of strength in the afternoon, which is the reason the Nasdaq had a decent bounce. Biotechs ($BTK) and Internets ($GIN) were two sectors that lagged behind.

Despite positive breadth and decent percentage gains, volume once again declined yesterday. Turnover in the Nasdaq was 9% lower than the previous day, while volume in the NYSE dropped by 3%. The previous day’s volume in the Nasdaq was already light to begin with, and yesterday’s volume came in 15% below its 50-day average level. Relatively speaking, volume in the NYSE was slightly better and came in at its 50-day average. Yesterday’s lower-volume rally was typical of the price-volume relationship we have been seeing over the past four weeks. Nearly every day the major indices have closed higher within the past five weeks has been on lower volume, while most of the down days for the broad market have been on heavier volume. The most recent day of accumulation for the Nasdaq occurred nearly three weeks ago, on February 11, when the index closed with a gain of 0.7% and on sharply higher volume. With the exception of that day, the past five weeks have been demonstrating a consistent pattern of lighter volume on the up days and heavier volume on the down days. This, of course, does not mean that the broad market will not continue to have occasional short-term rallies. But history has proven that an extended pattern of higher volume down days and lighter volume up days nearly always results in a correction, and sometimes the end of an uptrend. The broad market’s current price-volume relationship, which is inverse to what you would see in a healthy bull market, simply does not allow stocks to continue climbing higher for an extended period of time.

Yesterday’s rally in the Nasdaq enabled the index to close above its 50-day MA for the first time in two weeks. However, the daily chart is now showing some interesting trendline resistance that was formed from the January 26 high in the Nasdaq. This trendline is only a few points above yesterday’s close, so odds are good the Nasdaq will have to contend with this trendline at some point during today’s session. The daily chart of the Nasdaq below illustrates this trendline:

Since a “lower low” was recently set on the daily chart of the Nasdaq, the upper channel resistance of the downtrend (illustrated above) becomes even more important. Therefore, keep a close eye on how the Nasdaq acts as it nears this key resistance level. Unless volume increases sharply, odds are good the Nasdaq will have a difficult time getting through that resistance level. If you look at a daily chart of IWM (Russell 2000 Small Cap Index), you will see similar trendline resistance from its January highs. However, as you know, the S&P 500 and Dow Jones Industrial Average are both continuing to diverge from the Nasdaq and have NOT yet established a dowtrend line on their daily charts.

In the current environment, the biggest challenge of trading the broad-based ETFs such as SPY or DIA has been the low volume. Since volume has dropped off well below average levels, this has resulted in choppy intraday trading conditions. When volume is high, there tends to be more “trend days” that follow-through in one particular direction the entire day. This, in turn, makes it relatively simple to enter positions in the direction of the trend and simply ride the trend as long as possible. However, when volume is light, it usually results in an increased number of failed intraday breakouts, as well as breakdowns that don’t follow through in either direction. For intraday traders who are only looking to make a small profit and move on, the lack of follow-through is less of a concern. But for trend traders such as ourselves, it makes it difficult to ride a profitable trade for more than an hour or two, as opposed to our usual preference of staying in a trade for several days. This is the reason we have been having such a difficult time with making a profitable trade in the SPY and DIA shorts. While neither ETF has really gone anywhere within the past month, the sharp intraday reversals and whippy conditions have been resulting in an increased number of stop-outs, even though the ETFs often end where they started.

So, what is the solution to the increased choppiness that has resulted from a decrease in total market volume? I say you should consider trading more of the sector-specific ETFs such as SMH (Semiconductor), RTH (Retail), or PPH (Pharmaceutical) and less of the broad-based ETFs. While the broad-market has been choppy, we have noticed that many individual sectors have been trending much smoother. For a list of the sector-specific ETFs that we trade, take a look at the MTG Position Sizing Model. If, however, you desire to continue trading the broad-based ETFs, consider using a wider stop in order to prevent getting shaken out. You can correspondingly decrease your share size in order to compensate for the wider stop.

Today’s watch list:

ONEQ – Nasdaq Composite Index Tracking Stock
Short

Trigger = below 81.70
(below yesterday’s close)
Target = 79.50 (re-test of the Feb. 24 low)

Stop = 82.60 (above the 200-MA/60 min.)

Notes = We are looking to short ONEQ due to the overhead resistance of the primary downtrend line on the Nasdaq Composite, as discussed in the commentary above.

IWM – Russell 2000 Small Cap Index Tracking Stock
Short

Trigger = below 117.95
(below the upper channel of downtrend line)
Target = 115.05 (support of the 50-day MA)

Stop = 119.10 (above resistance of prior “swing high”)

Notes = Just like ONEQ above, IWM has trendline resistance and we will look to short a resumption of the downtrend of this trendline

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 = + $150

SPY short (from Feb. 27) –
shorted 114.94, covered 115.86, points = (0.92), net P/L = ($190)

DIA short (from Feb. 27) –
shorted 105.92, covered 106.85, points = (0.93), net P/L = ($192)

Open Positions:

(no open positions at this time)

Notes:

We covered SMH after it hit our profit target in the morning, but SPY and DIA were stopped out later in the afternoon. We currently have no open positions.

Edited by
Deron Wagner,
MTG
Founder and President