The Wagner Daily | May 17, 2004

Commentary:

Like the previous day, last Friday’s trading session was choppy and the major indices turned in a mixed performance. The Nasdaq Composite Index clearly showed relative weakness and closed 1.1% lower, but both the S&P 500 Index and Dow Jones Industrial Average closed flat on the day. The divergence between the Nasdaq and the S&P was quite substantial, and the breadth figures confirmed this as well. Declining volume outpaced advancing volume by a margin of 2 to 1 in the Nasdaq, but breadth was positive in the NYSE, where advancing volume outpaced declining volume by 4 to 3. Total market volume dropped by 7% in the NYSE and 1% in the Nasdaq, marking the second consecutive day of lower volume in the broad market. Given the choppy and indecisive action of last Friday, the session was much of a non-event and we traded minimally in the MTG Intraday Real-Time Room.

In last Friday’s Wagner Daily, we discussed the bullish “inverse head and shoulders” pattern that was forming on the Nasdaq Composite. Because the Nasdaq is still above the low of May 12 (the “head”), the pattern is technically still intact. However, Friday’s weak performance in the Nasdaq was certainly not encouraging and caused the index to close below the low of the “left shoulder,” which formed on May 11. Due to the amount of overhead supply that was created during Friday’s weakness, this decreases the odds of follow-through to the upside, which would occur if the Nasdaq traded above the “neckline” at the 1931 area (reference this chart for a visual reminder). Therefore, we no longer feel it is a “safe” bet to be long the Nasdaq in the short-term. While the Nasdaq could still move higher from here during the next 2 to 3 days, the risk/reward ratio is no longer very positive. Caution is recommended on the long side of the Nasdaq.

Both the S&P 500 Index and Dow Jones Industrial Average continue to hover around pivotal support of their 200-day moving averages, while the Nasdaq remains firmly below it. As you may recall, last Wednesday’s sharp intraday reversal was caused by the S&P 500 touching its 200-day MA and the index now rests 16 points above it. However, the Dow Jones closed 9 points below its 200-day MA and has traded in a very erratic manner near that level. Remember that the 200-day moving average is the single most closely watched moving average by institutions because it typically determines the long-term trend of an index. If an index or stock is trading below its 200-day MA, many traders and institutions focus the bulk of their trading on the short side, and vice versa. So, all eyes will be on the 200-day MAs as we enter this week and you should watch the same.

Below are daily charts of the S&P 500 and Dow Jones that illustrate the proximity of the 200-day MA. Notice the indecisive behavior around the current levels, as represented by the long “wicks” on both sides of the candlestick charts. Also note resistance of the upper channel of the downtrend, which the S&P ran into on Friday, and is illustrated by the descending red line:

On a separate note, keep an eye on the Gold and Silver mining stocks today because the index has been showing relative strength over the past several days and the monthly chart is showing support of the primary uptrend. Furthermore, overnight weakness in the dollar and terror fears may cause money to flow into this sector, which is often a perceived “safe haven.” We are already long NEM and PAAS, which we bought per a call in the MTG Intraday Real-Time Room on Friday. However, you may also want to consider other leading stocks in the sector such as PDG, ABX, GFI, and AU. Also watch the bond ETFs on the long side, which are TLT, IEF, SHY, and LQD.

As we mentioned last week, this is NOT a time to be aggressive in the markets on either side. The major indices have technically been in a downtrend since setting their 52-week highs earlier in the year, which means intermediate-term trading continues to favor the short side. However, the proximity of the 200-day moving averages makes it quite dangerous to be aggressively short right now because the 200-MA has been such a powerful support/resistance level in the past. Conversely, there is no reason to be aggressively bullish either, especially considering the Nasdaq remains below its 200-day MA, as does the important Semiconductor (SOX) index. So, take it easy out there until the markets give us a clear sign. Cash is king and capital preservation needs to be your primary focus right now.

Today’s watch list:

There are no new plays for today, although we remain long TLT with a solid unrealized gain.

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 = ($26)

Open Positions:

unrealized P/L = $92

Notes:

Per intraday e-mail alert, we bought DIA on Friday due to its relative strength, but sold it later in the day when it hit the trailing stop. We also remain long TLT, which is doing well now. Note the new, tighter stop on TLT.

Edited by Deron Wagner,
MTG Founder and
President