The Wagner Daily | April 6, 2004

Commentary:

The major indices spent most of the day consolidating in a tight range, near the previous day’s highs, until a rally during the final hour of trading pushed the broad market above the trading range. The S&P 500 Index traded in an extremely narrow (and boring) 4-point range until buyers stepped in at 3:00 pm EST and pushed the index five points higher. This enabled the S&P 500 Index to close with a gain of 0.7% and at a price of 1,150.50. Both the Dow Jones Industrial Average and the Nasdaq Composite Index traded in a similar fashion, as both indices pushed into positive territory during the last 60 minutes. The Dow closed 0.8% higher and the Nasdaq closed with a gain of 1.0%. Because volume was light, it was a quiet day overall and the closing rally yielded the only bit of excitement during yesterday’s session.

Volume in the NYSE yesterday declined 13% versus the previous day, while volume in the Nasdaq dropped 21% lower. Given that yesterday was basically a consolidation day, the decline in volume was not surprising. When an index breaks out and rallies on strong volume, as the major indices did last Friday, the next day is often a day of consolidation in which the broad market trades sideways and on lighter volume. This is known as a “correction by time” because it enables the broad market to digest its gains before making another leg higher. When the consolidation days occur on lighter volume, it is usually bullish because it indicates that the bears are not rushing to sell into the previous day’s strength. If, on the other hand, a consolidation day occurred on higher volume than the previous day, it would be bearish because it would represent “churning” that is usually associated with institutional distribution.

Even though yesterday’s lighter volume session was actually bullish, it concerns me that total market volume has been declining overall during the past month. For example, total market volume in the NYSE has come in above its 50-day average in only 2 out of the last 17 trading days. Since March 11, there has only been ONE day in which the Nasdaq’s volume registered above its 50-day average. Last Friday’s volume spike was refreshing, but the problem is that volume remains lethargic, which tells us that institutions, in general, continue to remain on the sidelines. As long as this trend continues, it seems highly unlikely that the major indices will break out to new 52-week highs anytime in the near future.

Although the major indices closed at their intraday highs yesterday, I would be extremely cautious of expecting more follow-through today because volume was so anemic. When markets rally on light volume, it only takes one wave of institutional selling to erase the gains that were earned on light volume. Obviously, the bears were nowhere to be found yesterday, but that does not mean they are not lurking and waiting for the right time to sell into strength. Don’t forget that each of the major indices recently broke below support of their primary uptrend lines that have been intact for a year. Upon doing so, the broad market rallied back up to its current levels because markets do not go straight down (or up) forever without correcting first. But, there is now a lot of overhead price resistance that was created from the previous highs that were set in February. As such, it would take a sharp increase in volume in order for the major indices to rally above its prior highs. There are not yet any solid technical signs that are telling us to get short again, but we feel it is quite risky to enter new long positions in the broad market at current levels. Other than trading individual sectors with relative strength or weakness to the broad market, your best bet is probably to sit on the sidelines in cash for the next day or two, at least until we see how the major indices react near their prior highs. Cash is king and missed money is always better than lost money!

Today’s watch list:

QQQ – Nasdaq 100 Index Tracking Stock
Short

Trigger = below 37.12 (below yesterday afternoon’s support)

Target = 36.10 (38.2% Fibo retracement of recent rally)

Stop = 37.58 (above yesterday’s high)

Notes = Due to negative news from Nokia, the Nasdaq futures are gapping down sharply this morning and the Nasdaq could break below support of its hourly uptrend line. As such, we are looking to short QQQ below yesterday afternoon’s support of 37.20. In the event of a gap down below the trigger price, remember to use the MTG Opening Gap Rules before entering the position.

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 = $21

Notes:

Per yesterday’s newsletter, we bought BBH when it rallied above its high of the first 20 minutes yesterday.

Edited by
Deron Wagner,
MTG
Founder and President