The Wagner Daily | May 24, 2004

Commentary:

The major indices once again traded in an indecisive manner last Friday, as they rallied moderately in the morning, but gave back most of their gains in the afternoon. Due to options expiration, stocks typically trade erratically on the third Friday of each month, and last Friday was no exception. However, given the recent pattern we have become accustomed to, it’s likely the broad market would have lacked intraday direction regardless of whether or not it was an options expiration day. Both the S&P 500 Index and Dow Jones Industrial Average closed approximately 0.3% higher, while the Nasdaq Composite gained 0.8%. Total market volume in the NYSE was 2% higher. But, unfortunately for the bulls, volume in the Nasdaq was 10% lighter than the previous day and was actually the lightest volume day of the year! As we often discuss, lighter volume “up” days in the broad market cannot be trusted because it indicates a temporary lack of sellers rather than an abundance of buyers. Without strong institutional participation, gains from rallies can be easily undone the following day, which is something we have seen numerous times over the past several weeks.

If you have been actively trading the markets over the past several weeks, you are probably aware that most of the charts have been choppy and a complete mess. Nearly every day has consisted of either a rally in the morning with a selloff in the afternoon, or vice versa, with closing prices usually in the middle of the intraday range. To illustrate this, take a look at the daily chart of QQQ (Nasdaq 100 Index Tracking Stock) below:

Looking at the area we highlighted on the chart above, notice how nearly every day has formed a “doji star” candlestick pattern, which is recognized by a narrow “body,” with a long “wick” both on the top and bottom of the candlestick “body.” A “doji star” candlestick forms when a stock or index closes near its opening price, but trades both above and below it throughout the day. When it forms at the top or bottom of a strong trend, a “doji star” candlestick pattern often precedes a short-term trend reversal. However, this pattern can also indicate simple indecision, which is common in choppy, trendless markets such as the one we have been in over the past three weeks.

If you look at the longer-term weekly charts, you may understand why the daily charts have been so indecisive. The weekly chart of the S&P 500, for example, is stuck below resistance of its 200-week moving average, but above support of its 40-week moving average (which is similar to the 200-day moving average). This tightening is now acting like a pressure cooker that should eventually result in a sharp move in one direction or the other, so be prepared for a range expansion very soon. The weekly chart of the S&P 500 below illustrates this:

Looking at the weekly chart of the Nasdaq Composite, you will notice that the 10, 40, and 200-week moving averages have all converged overhead at the 1,960 to 1,970 area. When you have moving average convergence on any time frame, it creates additional resistance or support, but triple moving average convergence on a WEEKLY chart is likely to create very strong overhead price resistance, so be quick to take profits if you are long the Nasdaq. The weekly chart of the Nasdaq below illustrates this moving average convergence:

Both the Nasdaq Composite and Dow Jones Industrial Average closed last week below their 200-day moving averages, which confirms that the rally that began in March 2002 is dead. However, this does not mean the broad market will fall apart here. A more likely scenario is that we continue to see indecisive, sideways trading action, which would represent a correction by time. Although QQQ broke below its 200-day MA, notice how it has just chopped around rather than collapsing. From a trader’s point of view, a downtrend would be much better than sideways trading action because traders such as ourselves thrive on trends, regardless of which direction. But, unfortunately, sideways and range-bound markets are more challenging to profit from because they require you to take your profits much quicker. Unless you can be nimble by jumping in and out of the market on the same day, you may want to continue sitting on the sidelines, with cash in hand. The market is proving you with no room for trading errors right now, so it’s not a time to be aggressive. The broad market will eventually begin to trend again, and being in cash now will enable you to take advantage of opportunity when it arises. Patient traders are always rewarded.

Today’s watch list:

There are no new trade setups for today, but we remain long SMH. Also, continue watching the gold and silver miners such as NEM, ABX, GG, PAAS, etc. The sector ($XAU) broke out on Friday and could move higher from here. There is no ETF, but you can create your own by trading a basket of the leading miners.

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:

(none)

Open Positions:

unrealized P/L = ($210)

Notes:

We remain long SMH with the same stop. No new trade entries from Friday.

Edited by Deron Wagner,
MTG Founder and
President