The Wagner Daily | April 15, 2004

Commentary:

Yesterday was a bit of a roller-coaster session, but the major indices eventually closed near the flat line. The broad market began the day with an opening gap down, which often occurs if the previous day was a strong downtrending day that closed at the lows. However, the major indices promptly recovered from the gap down and rallied all the way back to slightly positive territory. The broad market consolidated at its highs for several hours, but was unable to maintain its strength due to the overhead supply that was created from the previous day’s selloff. A selloff in the afternoon sent the S&P and Nasdaq back down to its morning lows, where they both formed a double bottom before rallying a bit into the close. This indecisive action resulted in a 0.3% loss for the Nasdaq Composite and a 0.1% loss for the S&P 500 Index. The Russell 2000 Small Cap Index once again showed relative weakness and closed with a loss of 0.7%. Total market volume was mixed. Turnover increased by 8% in the NYSE, but dropped by 6% in the Nasdaq. The day started with much stronger volume, but it dried up throughout the afternoon.

When the major indices have a smoothly trending day, as they did on Tuesday, the next day will often bring either a correction by time or price. A correction by time occurs when the major indices simply trade sideways at the upper or lower end of the previous day’s range. When an index gets ahead of itself or falls too sharply, a correction by time enables the various intraday moving averages to close in and provide support or resistance that will dictate the next move. A correction by price, on the other hand, is simply a price retracement in the opposite direction of the trend. If the previous day was a downtrend (like Tuesday), a correction by price would result in a bounce to resistance, while a correction to an uptrending day would result in a pullback to support. The trick, of course, is predicting exactly how high an index will bounce or how much it will pull back before resuming the previous day’s trend. One tool that works great for anticipating the extent of a bounce or pullback is Fibonacci.

If you are not familiar with using Fibonacci in your analysis, click this link for a brief overview and explanation. To determine Fibonacci resistance levels of a downtrend, we simply measure the distance from the top of the most recent selloff, down to the low, and plot the primary 38.2%, 50%, and 61.8% retracement levels. Most real-time charting software, such as TradeStation, will automatically calculate this for you. Generally speaking, the 38.2% and 50% retracement levels will usually act as solid resistance that will cause the stock or index to reverse and resume the direction of its prior trend. We applied Fibonacci to the S&P 500 Index yesterday in order to determine where the index was likely to find resistance when it rallied in the morning. Amazingly, the rally stopped dead in its tracks as soon as the index ran into its 38.2% Fibonacci retracement level. This caused the index to sell off down to its morning lows, where it formed a double bottom before bouncing again into the close. Below is an intraday chart of the S&P 500 that illustrates this. We have removed the moving averages so you can more easily see the Fibonacci levels:

Not only did the S&P rally stop at its 38.2% retracement, but the Dow rally stopped at exactly the same place as well. We used Fibonacci to determine our entry point to short DIA yesterday morning after it rallied into resistance. This enabled us to get a low-risk entry point for the short position because we waited for the rally into resistance, rather than shorting at the low of the day. The Nasdaq Composite Index also stopped at its 38.2% retracement level, but the tech-heavy Nasdaq 100 Index showed relative strength and actually rallied up to its 50% retracement level:

Going into today, keep a close eye on the Fibonacci retracement levels for the S&P 500 discussed and illustrated above. They are as follows:

S&P 500 Index –

38.2% – 1132

50% – 1135

61.8% – 1138

Retracement levels for the Nasdaq Composite Index (not illustrated above) –

38.2% – 2038

50% – 2044

61.8% – 2051

As long as the S&P and Nasdaq remain below their 61.8% retracement levels, odds are good that Tuesday’s downtrend will resume to new lows. However, a rally above the 61.8% retracement of that selloff means all bets are off for expecting further follow-through to the downside. With the amount of overhead resistance that was created from Tuesday’s high volume selloff, I would not be surprised if we see new lows either today or tomorrow, but I would not be too aggressive on the short side until we get confirmation. Confirmation of weakness would occur on a break of yesterday’s lows in any of the broad-based indices. We continue to view any bounce in the market as a chance to sell any long positions into strength and enter new short positions.

Today’s watch list:

IWM – Russell 2000 Small Cap Index Tracking Stock
Short

Trigger = below 115.85 (below yesterday’s opening price)
Target = 110.80 (prior low of March 24)

Stop = 117.75 (above the 50% retracement)

Notes = We netted more than a 3 point gain in IWM short earlier this week, but the index is still weak and stuck below resistance of its 20 and 50-day moving averages. Therefore, we are looking to re-short the index to catch its next move down to test its prior lows.

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 = + $163

QQQ short (HALF position, from April 6) –
shorted 37.10, covered 36.66, points = + 0.44, net P/L = + $82

Open Positions:

unrealized P/L = + $54

DIA short (from April 14) –
shorted 103.95, stop 105.05, target 102.20, unrealized points = (0.28), unrealized P/L = ($56)

Notes:

Per intraday e-mail alert, we shorted DIA into resistance yesterday and have posted the stop and target above. We also closed IWM over the 20 minute high, as well as half of the QQQ position. We are still short half position of QQQ.

Edited by Deron Wagner,
MTG Founder and
President