The Wagner Daily | April 23, 2004

Commentary:

Yesterday began relatively quietly, as the broad market traded in a narrow, sideways range during the first hour. However, the stock market began to see buying interest around 10:30 am EST that promptly enabled each of the major indices to break out to new intraday highs. Upon rallying to new intraday highs, each of the major indices ran into resistance of their 50% and 61.8% Fibonacci retracement levels we spoke of yesterday, but volume increased and provided the necessary momentum for the indices to push higher. Once the S&P, Dow, and Nasdaq each cleared their respective 61.8% retracement levels from Tuesday’s selloff, the rally picked up steam and set in motion an uptrend that lasted the entire day. Yesterday’s gains of 1.4% in the S&P 500 and Dow Jones Industrials, and 1.9% in the Nasdaq Composite, completely erased the losses each of those indices sustained during Tuesday’s selloff. Though we sustained a loss in a partial position of IWM short, our trailing stop strategy enabled us to protect and capture gains in the remaining shares of SPY and DIA that we were short from Tuesday.

Total market volume in yesterday’s session increased by 5% in the NYSE and 4% in the Nasdaq. While these may not sound like big increases, consider that the previous day’s volume was already substantially higher than average. To put it in perspective, yesterday’s NYSE volume of 1.8 billion shares was approximately 24% higher than its 50-day average level. Volume was also 20% higher than it was on Tuesday’s big selloff, which is bullish considering yesterday was an “up” day. Breadth was also very positive, as advancing volume in the NYSE outpaced declining volume by a ratio of nearly 4 to 1! These strong volume numbers, along with correspondingly impressive percentage gains, signals yesterday was clearly a bullish “accumulation day” that was marked by institutional participation, the first such day in quite a long time.

Yesterday’s gains caused each of the major indices to close back above their 50-day moving averages, but just below trendline resistance from their respective 52-week highs, which were set earlier this year. If these downtrend lines, which have been intact for several months, are broken, it will enable the S&P 500, Dow Jones Industrials, and the Nasdaq to each rally back up to their prior 52-week highs. Below are daily charts of SPY (S&P 500 Index), DIA (Dow Jones Industrial Average), and QQQ (Nasdaq 100 Index). The downtrend lines we are referring to are the thick red lines on each chart:

As you can see from the charts above, the markets’ performance over the next several days will determine whether or not the major indices will rally back to their prior 52-week highs or resume their primary downtrend lines that have been in place for several months. Since a “higher low” may be put in on the daily chart, an upside breakout could easily happen. If this occurs, all bets are off with regard to shorting the market. But, until the trendline is broken, we can only assume it will continue to act as resistance. We are not placing large bets on either side of the market until the trendlines are either broken (we buy) or the trendlines push the indices back down to a “lower low” (we short). Instead, we are taking a more conservative “wait and see” approach. By doing so, we can preserve capital until the picture becomes more clear. As a trader, time is always on your side if you are patient enough.

In yesterday morning’s Wagner Daily, I concluded my commentary with the phrase, “trade what you see, not what you think.” If you are not sure why I frequently sign off with that phrase, yesterday’s market action was a perfect example! Despite both bearish volume and chart patterns that pointed to the probability of lower prices, the broad market rallied sharply yesterday and rendered all those bearish signals irrelevant. Technical analysis works great at predicting probabilities, but the key word here is probabilities. No matter how intelligent you are or how accurate your technical analysis skills, you will sometimes be proven wrong by the market, which is why we live by the mantra of “trade what you see, not what you think.” No matter how strongly you may have THOUGHT the market was headed lower yesterday, it simply did not matter. The market went up instead, and to ignore what you clearly SAW and remained on the short side of the market would have caused you significant pain. The market is always right, regardless of whether or not it makes sense to you. Therefore, we recommend you write down the phrase and tape it to your monitor. . .Trade what you see, not what you think!

Today’s watch list:

Due to the trendline resistance discussed in the commentary above, we are hesitant to enter new long positions here until we get confirmation of the breakout first. However, we also see no reason to be short right now, given yesterday’s strong rally. As such, there are no new trade setups for today and we will wait patiently in cash for the next opportunity.

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 = + $49

DIA short (HALF position, from April 20) –
shorted 104.57, covered 104.11, points = + 0.46, net P/L = + $44

IWM short (HALF position, from April 21) –
shorted 114.16, covered 117.05, points = (2.89), net P/L = ($146)

Open Positions:

(none)

Notes:

Each of our short positions hit their trailing stops when the market reversed yesterday, so we are now fully in cash.

Edited by Deron Wagner,
MTG Founder and
President