The Wagner Daily | March 10, 2004

Commentary:

The broad market followed through on Monday’s weakness with another day of steadily downtrending prices. Even though prices went lower, the second consecutive trending day was a nice change from the erratic and sudden intraday reversals we have become accustomed to lately. As short-term traders, we really don’t care whether the market trends higher or lower, just as long as we have a trend. Each of the major indices opened near the flat line, trended steadily lower and closed lower on the day. The intraday range of the S&P was relatively narrow yesterday, but the index trended lower and closed with a loss of 0.6%. This enabled us to profit from our short in SPY (S&P 500 Index), which we shorted when it broke below yesterday’s low. The Nasdaq Composite Index closed below the psychological support level of 2,000 yesterday and notched another loss of 0.7%. The Dow Jones Industrial Average showed the most relative weakness yesterday and closed, like the Nasdaq, with a loss of 0.7%, firmly below its 50-day moving average for the second consecutive day.

Though the Nasdaq has had seven days of closing prices on higher volume within the past six weeks, the S&P has been mostly closing its down days on lower volume. However, this seems to be changing based on yesterday’s price-volume relationship. Yesterday was a clear distribution day because the S&P and Dow both closed approximately 0.6% lower, but on volume that was 17% higher than the previous day. This indicates institutional selling (aka distribution) has begun to hit the S&P and Dow, which have been diverging from the Nasdaq until now. Volume also increased by 3% in the Nasdaq, making yesterday another distribution day in the Nasdaq. It’s clear that the bullish sentiment has completely changed from just a few months ago.

The S&P 500 Index closed below support of its 20-day moving average for the second consecutive day and also bounced off support of its 50-day moving average. Yesterday was the first time since November 24 that the S&P touched its 50-day moving average. Though it closed above it yesterday, keep a close eye on the index today. If the S&P 500 Index drops below yesterday’s low of 1,136.84, it will break below its 50-day moving average, which is at 1,137.10. The chart below illustrates the support level to watch on the S&P:

The Nasdaq briefly traded below its prior low of 1,991 yesterday, which was set on February 24. A close below that price would have marked the second consecutive “lower low” on the daily chart, but a small rally during the last hour pushed the Nasdaq back above the 1,991 level and closed at 1,995. Obviously, the 1,991 area, and now yesterday’s low, is a key support level to watch going into today. Yesterday’s loss in the Nasdaq put the index in the negative for the year because it opened 2004 at a price of 2,003 (love how the Nasdaq closed the year 2003 at a price of 2,003). Despite the year-to-date loss in the Nasdaq, the combined trade calls from our Intraday Real-Time Room and the Wagner Daily have yielded quite profitable results during that same time, as our detailed trade stats represent.

The Dow is firmly below its 50-day moving average and is now trading in the area of support from January. We are watching the January 29 low of 10,417 as the next support level. Below that, expect to find support at the January 13 low of 10,367. The price target on our DIA short (which we entered a few days ago) is 103.80, which correlates to an approximate low of 10,367 in the Dow. Take a look:

The Dow started trading below its 50-day moving average two days ago and the Nasdaq has been below it for several weeks. So, it is likely the S&P 500 will follow suit as well. If that occurs, all three major indices will be trading below their 50-day moving averages for the first time in nearly six months. The major indices recovered rather quickly and subsequently rallied to new highs when they all dropped below their 50-day moving averages last November. Will the same thing happen again? It’s not likely because two major things are different this time. First is that the Nasdaq is technically in an intermediate downtrend, as it has formed a series of “lower highs” and “lower lows” on its daily chart. When the Nasdaq broke below its 50-day MA last November, it was still technically in an uptrend because it never formed a “lower low.” The second difference this time around is that volume patterns have been confirming the weakness. Unlike last November, most of the up days are on lighter volume, while most of the down days are on heavier volume. This, of course, is the opposite of what you would see in a healthy bull market, but it does confirm the recent weakness in the broad market.

Today’s watch list:

RTH – Retail HOLDR
Short

Trigger = below 93.90
(below yesterday’s low
Target = 91.80 (50-day MA)

Stop = 94.77 (above the 20-day MA)

Notes = As the S&P is now beginning to finally show signs of distribution, the formerly high-flying retail sector is beginning to show weakness. RTH broke below support of its consolidation and its 20-day MA yesterday, and we expect further follow-through down to its 50-day MA. Remember to watch $IRH.X instead of RTH because the index itself can give you a more accurate idea of the fair value due to the narrow spread. Also use limit orders when trading RTH, due to its wide spread.

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 = + $202

SPY short (from March 9) –
shorted 114.85, target 112.60, stop 115.85, unrealized points = + 0.35, unrealized P/L = + $70

Notes:

We shorted SPY per yesterday’s newsletter and remain short DIA, which now has an unrealized gain of + 1 point.

Edited by
Deron Wagner,
MTG
Founder and President