The Wagner Daily | March 29, 2004

Commentary:

Despite small losses, last Friday’s broad market action was healthy and exactly as the bulls would want to see. This is because the major indices were able to retain nearly all of the previous day’s large percentage gains and simply consolidated on lighter volume. The S&P 500 Index and Dow Jones Industrial Average both closed 0.1% lower, while the Nasdaq Composite Index gave back 0.4%. Considering the Nasdaq’s 3% gain the previous day, a loss of only 0.4% was not a big deal. Most importantly, total market volume in the NYSE declined 13%, while volume in the Nasdaq dropped nearly 20% versus the previous day. If Friday’s marginal losses would have occurred on higher volume than the previous day, it would have indicated that institutions were selling into the strength of the previous day’s rally. Conversely, lighter volume on a down day, particularly one that occurred after a day of higher volume gains, is bullish because it indicates that sellers did not seize the opportunity to sell into the strength of the previous day’s gains. When combined with the previous day’s large gains that occurred on higher volume, we see that the price to volume relationship of the past two days has been bullish, although much technical price resistance remains overhead.

On a sector-specific basis, we hope many of you profited from our idea to buy the gold and silver mining stocks last Friday. The Philadelphia Gold and Silver Sector ($XAU) has just begun breaking out of a volatility contraction on its daily chart and appears poised to make another leg higher from here. The new Gold ETF still has not been launched due to regulatory hassles, but you may wish to create your own synthetic ETF by simply trading a small basket of the leading individual gold stocks. Leading gold stocks to consider are: NEM, ABX, PDG, GFI, and AU. I particularly like the daily charts of both NEM and ABX here. CDE is a silver stock to watch. As always, use protective stops because the gold stocks can sometimes be pretty volatile.

As predicted, the S&P 500 Index lost its strength and formed an intraday double top after perfectly rallying into resistance of its 200-week moving average on Friday. As we illustrated in the last Wagner Daily, the 200-week simple moving average for the S&P 500 Index was at the 1,114 level and, interestingly, 1,115 marked Friday’s intraday high in the S&P. By using the information we provided you on Friday morning and physically making a note that major resistance in the S&P was at 1,114, you would have easily known a logical level to take profits on any long positions in SPY (or DIA). The 15-minute intraday chart of the S&P 500 below illustrates how the index sold off twice after rallying into the 1,114 resistance level (horizontal red line):

The selloff that occurred in the S&P 500 during the final thirty minutes of trading caused the index to close with its third consecutive week of losses and second consecutive week below its 200-week moving average, which formerly acted as support. However, after coming into support of its 40-week moving average, the Nasdaq Composite began showing relative strength to the S&P and Dow and closed with a 1% gain for the week.

Given Friday’s closing prices in the broad market, the primary support and resistance levels for the major indices remain the same as we analyzed in last Friday’s newsletter. Just to refresh your mind, key resistance for the Nasdaq Composite remains the upper channel of the primary downtrend line that began in January. The Nasdaq will run into this resistance around the 2,000 level, which is 40 points higher than last week’s closing price. As for support, the Nasdaq needs to hold above the 1,940 level, which represents an approximate 50% retracement of last Thursday’s gain. A drop below that level could trigger a wave of selling, while a break above Friday’s high of 1,977 would be bullish and probably enable the Nasdaq to quickly test its trendline resistance around the 2,000 level.

For the S&P 500 Index, Friday’s high of 1,115 remains the key resistance level to watch because of that convergence with the 200-week MA. Support is at the 1,100 level, which represents both a 50% retracement of the recent rally and price support from the last week’s break out of consolidation. The Dow Jones Industrial Average is kind of in “no-man’s land,” with no major moving average support directly below and no significant moving average resistance directly above.

Our thoughts on trading the broad market remain the same as we enter the coming week; stick to the Nasdaq on the long side. The S&P 500 and Dow Jones Industrial Average both have more immediate resistance to deal with and have also not corrected as much as the Nasdaq during the past two months. Therefore, we continue to believe that the Nasdaq may continue to grind its way higher, while both the S&P and Dow languish. A follow-through rally of more than 2% in the Nasdaq within the next few days would begin to attract buyers to the market again. But, the key will be whether or not the Nasdaq is able to achieve those gains on a corresponding surge in volume. As always, volume remains the one indicator that never lies and is the most accurate predictor of future price action in any index or stock. Volume speaks volumes, so pay close attention to whether or not the broad market is able to close higher AND on higher volume this week, or whether the rally runs out of fuel.

Today’s watch list:

SMH – Semiconductor HOLDR
Long

Trigger = above 39.70 (above the 20-day MA)
Target = 40.95 (daily trendline and 10-week MA resistance)

Stop = 39.07 (below Friday’s low)

Notes = We anticipate the Semiconductor ($SOX) Index will make another leg higher from here, at least up to resistance of the upper channel of its primary downtrend line. We are looking to profit from that move by taking a long position in SMH if it rallies above $39.70 and will sell into strength just below resistance at $41 area. In the event of a gap up above the trigger price, remember to use the MTG Opening Gap Rules.

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 = + $256

Notes:

We remain long QQQ with stop at 35.08. Will trail stop higher today if QQQ breaks above Friday’s high.

Edited by
Deron Wagner,
MTG
Founder and President