The Wagner Daily | May 18, 2004

Commentary:

The broad market began the week on a negative note, as each of the major indices sustained significant losses yesterday. Both the S&P 500 Index and Dow Jones Industrial Average lost 1.1% yesterday, while the Nasdaq Composite closed 1.4% lower. Rather than being the result of a downtrending day, all of yesterday’s losses were the result of negative opening gaps. After the open, each of the major indices traded sideways in a narrow and choppy range, which made it challenging to find solid intraday trade setups in the broad market. In order to profit on the short side of any ETFs yesterday, you basically had to be short from over the weekend because the intraday trading ranges were simply too narrow and choppy. However, our long position in TLT(iShares 20+ year t-bond ETF) is now working very well and we sold half the position for a 1-point gain yesterday.

Total market volume increased by 7% in the NYSE yesterday, but was about the same as the previous day in the Nasdaq. As we have become accustomed to seeing, a bearish “distribution day” occurred in the NYSE due to yesterday’s volume increase and corresponding losses. However, despite the 7% increase, total market volume in the NYSE was below its 50-day average level. In fact, volume has been below its 50-day average for the past three days. Even though the Nasdaq lost 1.4% yesterday, the lack of increase in turnover means that yesterday was technically NOT a distribution day in the Nasdaq. With the exception of April 12, the last three days have been the Nasdaq’s lowest volume days of the calendar year.

In yesterday’s Wagner Daily, we spoke about the importance of the 200-day moving averages, as many professional and institutional traders are closely watching that level. Yesterday’s action was proof as this, as the S&P 500 Index quickly found support after yesterday’s gap down, due primarily to the 200-day MA, which marked yesterday’s low. Like last Wednesday, May 12, the S&P 500 Index found support at its 200-day moving average, but this time it failed to form a sharp intraday reversal. The daily chart below illustrates how the S&P 500 has found support at the 200-day MA twice within the past five sessions, but also has resistance of its primary downtrend line overhead (the red descending line):

The Dow Jones Industrial Average, which has been closing within a few points of its 200-day MA during the past four sessions, finally resolved itself to the downside yesterday and closed 1.2% (118 points) below its 200-day moving average. The Nasdaq Composite Index once again showed relative weakness and, unlike both the S&P and Dow, closed below support of the May 12 low. The S&P 500 Index keeps bouncing off support of its 200-day MA, but the Nasdaq is well below it. While the S&P held above its low of May 12, the Nasdaq closed below it. Compare the daily chart of the Nasdaq (below) to the S&P 500 chart (above) and you will notice the big divergence:

I’ve got to say that I really do not like the mixed signals the broad market is giving right now. While we can profit from shorting a downtrending market and buying an uptrending one, the choppy and erratic markets are the most challenging to trade, and that’s what we’re in right now. Allow me to explain the general dynamic of what has happened over the past week and perhaps you will agree. . .

After trending steadily lower for more than a month, the S&P 500 Index sold off sharply down to its 200-day moving average last Wednesday, May 12. This test of the 200-day MA support prompted a sharp, bullish reversal later that same day, which enabled the index to erase the 1.7% loss it was showing earlier that morning. For the next two days, the S&P consolidated on lighter volume and traded within the upper third of the range from May 12, albeit with numerous false breakouts and breakdowns that occurred intraday. The sharp, high volume reversal of May 12, followed by two lighter volume consolidation days, is normally bullish and leads to higher prices. However, the buyers failed to step in and caused the S&P to break below support of its consolidation yesterday, May 17. The failure of the consolidation should have led to an equally bearish reaction due to trapped bulls, but the S&P found support instead, thanks to its 200-day MA. But, despite the index holding above its 200-day MA yesterday, buyers once again failed to show up. Most importantly, the light volume numbers of the past three days suggest the sellers are taking a break, but buyers are simply not interested in taking a stance here.

This lack of interest on behalf of both the bulls and bears is creating very dangerous market conditions that could easily trap traders on both sides of the market alike. We therefore feel the most prudent position to have right now is a large percentage of cash. Remember you can not force the market to conform to your wishes; instead, simply wait on the sidelines until the market resolves itself one direction or the other. By being mostly in cash, it allows you to be nimble and take advantage of opportunity whenever it finally presents itself. Successful traders have many different strategies that are profitable, but there is one thing that the most profitable traders have in common. They are all OUT of the markets more than they are IN the markets because they are patient and disciplined. Consider doing the same.

Today’s watch list:

There are no new plays for today, although we are long EWH (per yesterday’s intraday e-mail alert) and half position of TLT from May 13..

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 = $107

Open Positions:

unrealized P/L = $118

EWH long (from May 17) –
bought 8.94, stop 8.74, target 9.35, unrealized points = 0.00, unrealized P/L = $0

Notes:

We sold half of our TLT position for a 1-point gain yesterday, just to lock in some gains. We took the remaining shares overnight and have raised the stop, as per above. We also bought EWH before the close, due to the relative strength it was showing all day. We are simply anticipating a bounce from oversold conditions in that one.

Edited by Deron Wagner,
MTG Founder and
President