The Wagner Daily | May 13, 2004

Commentary:

The major indices experienced huge volatility yesterday, as the bulls and bears battled it out intraday. The bears were firmly in control during the first half of the day, as breadth was extremely negative and volume surged during the morning selloff. At its intraday low, the Nasdaq Composite Index was down as much as 2.7%, while both the S&P 500 and Dow Jones Industrial average were off 1.7%. After a small bounce and subsequent selloff during the mid-day doldrums, the broad market formed an intraday double bottom around 2:00 pm EST. Then, just as sharply as the major indices sold off in the morning, they began to rally in the afternoon. Although volume was high during the morning selloff, it increased even more during the afternoon rally, which was actually quite impressive. The rally picked up momentum as the day progressed, and eventually enabled both the S&P 500 and Dow Jones to close approximately 0.3% higher on the day, while the Nasdaq closed only 0.3% lower. A gain of 0.3% in the S&P and loss of 0.3% in the Nasdaq may not sound very impressive, but considering the huge reversal off the intraday lows and closing prices near the intraday highs, yesterday’s session was quite bullish! When the broad market formed an intraday double bottom and showed an extreme negative breadth reading in the early afternoon, subscribers to the MTG Intraday Real-Time Room were warned to cover their short positions and provided with a specific ideas of stocks to buy if the market began rallying. This volatility enabled subscribers to profit both from a few individual stocks on the short side in the morning and the long side in the afternoon.

Yesterday’s total market volume increased by 11% in the NYSE and 14% in the Nasdaq. Since both the S&P 500 and Dow Jones closed positive yesterday and on higher volume, this means yesterday was technically an “accumulation day,” the first in many weeks. The Nasdaq closed with a small loss, but I would not consider yesterday to be a bearish “distribution day” because the afternoon volume on the upside was higher than the selling volume in the morning. Furthermore, the rally that enabled the Nasdaq to turn a 2.7% loss into a 0.3% loss was certainly bullish. Yesterday’s price to volume realtionship definitely pointed to signs of institutional buying interest, which has become rare over the past several months. But, before you begin buying stocks and ETFs, remember that the major indices remain in a primary downtrend, as illustrated in yesterday’s weekly charts. Yesterday’s action should definitely serve as the first warning sign to potentially cover any short positions, but we need to see at least another day of broad-based gains on higher volume within the next week in order to confirm yesterday’s bullish reversal.

Yesterday morning’s sharp selloff and subsequent afternoon reversal caused bullish “hammer” candlestick formations to form on the daily charts of the major indices. For the first time in more than a year, the S&P traded below its 200-day MA yesterday, which seems to have been the reason for the afternoon rally. Most likely, institutional program trading kicked in on the “buy” side after the S&P touched its 200-day MA. We’ve been talking about the importance of the 200-day moving average for the past week, and the S&P’s bounce off this key support level was a perfect testament of this. The daily chart of the S&P 500 Index below illustrates the perfect bounce off the 200-day MA. The downward sloping blue line illustrates the first trendline resistance the S&P will encounter on any follow-through rally attempt today:

The daily chart of the Dow Jones Industrial Average is equally interesting because of huge “tail” or “wick” that was formed BELOW the 200-day moving average on yesterday’s candlestick. The afternoon rally in the Dow was truly impressive because it enabled the index to close back above its 200-day MA and the psychologically important 10,000 level. Note the long “wick” on yesterday’s candlestick of the Dow, as well as the next trendline resistance, as annotated with the descending blue trendline:

Although the Nasdaq Composite rallied yesterday afternoon, the index remains 17 points BELOW its 200-day moving average, which is likely to cause resistance on any further rally attempts. Since both the S&P 500 and Dow Jones closed ABOVE their 200-day MAs, but the Nasdaq is still below it, you will probably have more favorable odds buying the S&P and Dow-related sectors and ETFs such as financials, retail, and pharmaceuticals, rather than the technology-related sectors. This is simply because there is less overhead supply in these sectors than the tech-related ones.

If the broad market closes flat to higher today, it will be bullish because it means that traders were not selling into the strength of yesterday’s reversal. A flat close today would probably position the market for another leg higher, at least up to the upper channel of the downtrend lines illustrated in the charts above. However, a retracement down to the middle of yesterday’s range would call the validity of yesterday’s reversal into question. Take it easy out there until we get more confirmation either way.

Today’s watch list:

DIA – DIAMONDS (Dow Jones Industrial Average Index tracking stock)
Long

Trigger = above 101.06 OR below 100.60 (whichever comes first)
Target = 101.90 (resistance of the daily downtrend line)

Stop = 15 cents below the low of first sixty minutes

Notes = Per the commentary above, we expect the Dow to bounce at least up to its primary downtrend line, so we are just looking to play the bounce on the long side. We will either buy DIA on a pullback or rally above yesterday’s high, whichever comes first. The stop will be just below the low of the first hour of trading.

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 = + $60

Open Positions:

unrealized P/L = ($48)

Notes:

Per intraday e-mail alert, we made judgement call to cover SMH in the morning and netted a small profit. We also remain long IEF with the same stop.

Edited by Deron Wagner,
MTG Founder and
President