The Wagner Daily | May 20, 2004

Commentary:

Yesterday was the perfect example of why we have been so adamant about being cautious, trading lightly, and reducing your position size over the past week. After beginning the day with a sharp opening gap above their respective highs of the past week, the major indices trended steadily higher throughout the entire morning session, then consolidated at the top of the range for several hours during the doldrums. At its intraday peak, the Nasdaq Composite was trading 2% higher on the day, while the S&P 500 was up 1.4%. More importantly, volume was very strong during the morning rally, as the Nasdaq was showing more than a 30% increase in total volume versus the previous day. When you have a “breakaway” gap above a multi-day high that subsequently consolidates at the intraday highs for several hours, the stock or index will nearly always result in a breakout to new intraday highs and resumption of the uptrend in the afternoon. Considering the sharp increase in volume during the morning rally, this made the odds of higher prices in the afternoon even more likely. But, high probability is just that — probability. Much to the surprise of many traders, the broad market sold off sharply in the afternoon, causing the Nasdaq to completely give back its 2% gain and close exactly flat, while both the S&P 500 Index and Dow Jones Industrial Average closed with losses of 0.3%. It was certainly a volatile day that equally hurt the bears in the morning and the bulls in the afternoon, except for those who used tight stops to protect their profits and minimize their losses.

By the end of the day, total market volume in the Nasdaq had surged 27% above the previous day’s level, while volume in the NYSE was 16% higher. If the broad market would have held on to its intraday gains, this sharp increase in volume would have been very bullish because it would have finally indicated a return of institutional buying interest. However, we noticed that volume was nearly as high on the way down as it was during the morning rally. Since the S&P an Dow both closed in the red, and on higher volume, yesterday was actually a distribution day in the NYSE. Obviously, the markets will continue to have a difficult time going higher unless we begin to see some days of higher closing prices AND on higher volume.

We cannot know for certain what caused the sudden surge of sell orders yesterday afternoon, but one thing we noticed was that the Semiconductor Index ($SOX) ran into resistance of its prior high from May 11. Traders apparently took the test of resistance as a cue to sell into strength rather than attempt to buy a breakout. Because the SOX index is so heavily weighted within the Nasdaq, weakness in that index will nearly always cause the Nasdaq to follow suit and trade lower as well. Below is a daily chart of the $SOX index that illustrates the double top that has now formed at the prior high from May 11:

As we’ve been drilling in your head for the past week, this is NOT the ideal market environment to be aggressive with entering new trades right now because their continues to be a giant tug-of-war between the bulls and bears. Rather than trying to anticipate which direction the market will finally go, we think it is best to remain mostly on the sidelines and wait patiently in cash. If, however, you decide to trade, avoid the broad-based ETFs such as SPY, DIA, and QQQ and instead consider the sector-specific, International, and Fixed-Income ETFs. It is very difficult to anticipate the direction of the broad market’s next move, but these other types of ETFs are less tied to the direction of the S&P, Dow, and Nasdaq. Within the past week, we have traded TLT (fixed-income), EWH (international), and SMH (sector-specific) and have had much better results than if we were attempting to swing trade the broad-market ETFs instead. Whatever you decide to do, remember to trade what you see, not what you think because the market is always right!

Today’s watch list:

There are no new plays for today, although you may want to keep an eye on the gold and silver mining index ($XAU), which broke above resistance of its primary downtrend line yesterday. FYI, we are currently long NEM and PAAS in the MTG Intraday Real-Time Room.

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 = + $180

TLT long (HALF position, from May 13) –
bought 80.85, sold 81.28, points = + 0.43, net P/L = + $40

Open Positions:

unrealized P/L = ($190)

Notes:

Per intraday e-mail alert, we sold EWH into the opening gap yesterday because it hit our original profit target. TLT hit its trailing stop. We bought SMH on a break above its 20-minute opening high and remain long.

Edited by Deron Wagner,
MTG Founder and
President