The Wagner Daily | May 6, 2004

Commentary:

Although one might have expected to see a big move in the broad market on the day following an FOMC meeting, the major indices found little direction yesterday. The S&P 500, Dow Jones, and Nasdaq Composite each attempted to break out on several attempts yesterday, but were met by resistance from their highs of the previous day. This caused the major indices to drift up and down in a narrow range before closing near the middle of their intraday ranges. The S&P 500 Index closed with a 0.2% gain, but the Dow closed 0.1% lower. The Nasdaq Composite closed with a 0.3% gain. Volume declined by 11% in the NYSE and 15% in the Nasdaq. Yesterday was the third consecutive day of gains in the Nasdaq, but each day has been on declining volume. This is obviously the opposite of what you would see in a bullish market. On a separate note, the Oil Service Index ($OSX) gapped down sharply yesterday morning, which enabled us to net nearly a 3 point gain in our OIH short position.

Yesterday’s intraday trading range in the major indices was fully contained within their respective ranges of the previous day, which means that yesterday was known as an “inside day.” When the broad market forms an “inside day,” it means that little has changes from a technical point of view. For the past two days, each of the major indices have shown a lot of indecision and closed near the middle of their intraday trading ranges. This has formed a “doji star” candlestick formation on many daily charts, which confirms the indecision and tug-of-war that is taking place between the bulls and bears. The daily chart of the Dow Jones Industrial Average below illustrates the two consecutive “doji stars” that have formed:

As you can see on the chart above, primary resistance on the Dow Jones Industrial Average remains at the 10385 area, which represents convergence of the 20 and 50-day moving averages, as well as the high of Tuesday. On the S&P 500 Index, there is perfect convergence of the 20 and 50-day moving averages at the 1129 area, which also correlates to Tuesday’s high.. Therefore, both the 10385 area on the Dow and the 1129 area on the S&P 500 will continue acting as very key resistance levels in the coming days. Our bias will remain on the short side, and we will remain short SPY, unless the S&P rallies above 1130 and/or the Dow rallies above the 10390 area. Support on the Dow is at the 10266 area, which is the low of May 4. Below that, next support is at the 10,220 area, which marks last week’s lows. On the S&P, the same support levels are at the 1107 to 1112 area.

The Nasdaq Composite has formed a similar chart pattern to both the S&P and Dow over the past several days, but remains well below its 20 and 50-day moving averages. This is largely due to weakness in the Semiconductor ($SOX) Index, which has already broken below its prior lows from March and has been unable to rally since. Resistance on the Nasdaq is now at the 1965 to 1970 range, which corresponds to the highs of the past two days. Both the 20 and 50-day moving averages are up around the 2000 level. Short-term support on the Nasdaq Composite can be found at the 1945 to 1950 level, which represents the lower channel support of the hourly uptrend line. The hourly chart of the Nasdaq below illustrates this trendline:

If the Nasdaq breaks below the trendline shown above, the 200-day MA may provide support at 1937. Below that, the Nasdaq will probably drop down to the low of April 30, which is at 1920.

As of the time of this writing, both the S&P and Nasdaq are trading much lower in the pre-market session. If the futures open at current levels, both the S&P and Nasdaq are likely to open BELOW yesterday’s lows. If this occurs and the gap down does NOT recover within the first 30 minutes of trading, odds are good that we will see a downtrending day today, so you may want to be prepared for short entries today. However, if the gap gets filled and the market recovers by 10 am EST, all bets are off on the short side, as we will be back in the choppy range.

Today’s watch list:

IWM – iShares Russell 2000 Small Cap Index
Short

Trigger = below 113.10
(below yesterday’s low)
Target = 109.50 (just above the 40-week MA support)

Stop = 114.55 (above yesterday’s high)

Notes = Remember that full position size of IWM is only HALF the position size of SPY, based on the MTG Position Sizing Model. This is because IWM is more volatile. Also, remember to use the MTG Opening Gap Rules before shorting IWM, which means wait for a break of the 20 minute low if it gaps down below its trigger price.

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 = + $287

Open Positions:

unrealized P/L = ($63)

Notes:

Per intraday e-mail alert, we covered and took profits on our OIH short position at yesterday’s open. We also remain short half position of SPY.

Edited by Deron Wagner,
MTG Founder and
President