The Wagner Daily | March 3, 2004

Commentary:

Monday’s gains that kicked off the month of March on a positive note were short-lived, as the S&P 500 Index and Nasdaq Composite Index both gave back two-thirds of the previous day’s gains yesterday. The S&P 500 gained 1.0% on Monday, but lost 0.6% yesterday. The Nasdaq Composite similarly gained 1.4% on Monday, but gave back 0.9% yesterday. The Dow Jones Industrial Average showed the most relative weakness and gave back all of the previous day’s 0.9% gain. Most importantly, yesterday’s loss in the Nasdaq was on 10% heavier volume than the gain that was achieved the previous day. This means that the Nasdaq had its sixth day of losses on heavier volume (aka “distribution day”) within the past five weeks. Conversely, there has only been one solid day of gains on higher volume (aka “accumulation day”) during this same time period. On a slightly more positive note, volume in the NYSE
yesterday was 2% lighter than the previous day, confirming that the selling was more intense within the Nasdaq. If you have been paying close attention to our daily analysis of the broad market’s price to volume relationship over the past several weeks, yesterday’s losses in the major indices should not have come as a big surprise. When volume on the up days such as Monday continues to decline, you simply cannot expect broad-based gains to last for more than a day or two.

Technical analysis worked very well at predicting two different key turning points in the broad market yesterday. The first such instance occurred when the Nasdaq Composite Index rallied into the upper channel resistance of its primary downtrend line. In yesterday’s newsletter, we illustrated how the Nasdaq was approaching this trendline and mentioned that the index would probably test its trendline resistance at some point during yesterday’s session, which is exactly what occurred. The daily chart of the Nasdaq Composite below illustrates how yesterday’s high perfectly marked the trendline resistance we predicted yesterday:

As you can see on the chart above, yesterday’s reversal in the Nasdaq was “textbook” in that the index headed south immediately after rallying into resistance of its trendline. This put the Nasdaq Composite back below its 50-day moving average after only trading above it for one day. When combined with the Nasdaq’s recent “lower high” and subsequent “lower low” that was set last week, this means the intermediate-term trend of the Nasdaq remains down. We therefore expect the Nasdaq Composite to test support of its prior low of 1,991, which was set on February 24. It will be interesting to see whether or not the 2,000 level once again acts as support and enables the Nasdaq to form a double bottom.

The second event in which technical analysis worked perfectly yesterday occurred when the S&P 500 Index bounced off of the previous day’s low. Within any given index, the previous day’s intraday high and low prices will always act as resistance or support. This information can be used to predict reversal points in the market. When the S&P futures began selling off during yesterday afternoon, we mentioned in the Intraday Real-Time Room that the S&P futures would likely find support at the 1146.70 level, which equated to the previous day’s low. Interestingly, that level perfectly marked yesterday’s low, at which point the S&P reversed. Below is a 15-minute intraday chart of the S&P futures that illustrates the perfect double bottom off the previous day’s low:

Whether you trade ETFs or the actual futures contracts, paying attention to the previous day’s high and low will benefit you equally. If, for example, you were daytrading SPY (S&P 500 Index ETF) on the short side yesterday, you could have used the previous day’s low as a perfect target in which to cover your short position.

Going into today, keep a close eye on the daily charts of both SPY (S&P 500) and DIA (Dow Jones Indu.). Both charts are beginning to form the right shoulder of a bearish “ascending head and shoulders” chart pattern, which we will look at in tomorrow’s Wagner Daily. Specifically, keep an eye on the 10,520 to 10,530 level on the Dow. The 50-day MA is at 10,533, which converges with last week’s low of 10,521. Therefore, the 10,520 to 10,530 area is a key support level that would trigger a sell signal if broken. The Dow has been above its 50-day MA since November of 2003, so a confirmed break below that would likely trigger quite a few institutional sell orders. You may consider shorting DIA if the Dow breaks the 10,520 level, especially if it does so on high volume. As always, remember to trade what you see, not what you think!

Today’s watch list:

DIA – DIAMONDS (Dow Jones Indu. Avg. Index Tracking Stock)
Short

Trigger = below 105.45
(below the 50-day MA)
Target = 103.80 (Jan. 13 low)

Stop = 106.20 (above yesterday’s close)

Notes = See commentary in last paragraph above for explanation of trade setup.

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 = + $35

ONEQ short (from March 2) –
shorted 81.66, stop 82.60, target 79.50, unrealized points = + 0.25, unrealized P/L = + $50

Notes:

Both ONEQ and IWM shorts triggered, per yesterday’s Wagner Daily. Will trail stops lower as we are able.

Edited by
Deron Wagner,
MTG
Founder and President