The Wagner Daily | May 26, 2004

Commentary:

For the first two hours of yesterday’s session, it appeared the broad market was in for another lackluster day of indecision and chop. But, as the mid-day doldrums began, volume began to increase and each of the major indices began a stealth rally. The momentum of the mid-day rally fed on itself, fueled in part by short covering, and volume continued to increase throughout the afternoon session. The intraday uptrend remained smooth and intact throughout the entire afternoon, causing each of the major indices to close at their intraday highs. Though it initially showed relative weakness, the Nasdaq closed with an impressive 2.2% gain, while both the S&P 500 Index and Dow Jones Industrial Average posted 1.6% gains. Given the abundance of choppy, range bound days we have seen over the past month, it was very refreshing to see the market trend smoothly for an entire day. It was the first “trend day” in weeks!

More importantly than yesterday’s broad market gains is the fact that total market volume also increased significantly. Volume in both the NYSE and Nasdaq was approximately 25% higher than the previous day. Breadth was also quite positive, as advancing volume outpaced declining volume by a whopping margin of 8 to 1 in both the NYSE and Nasdaq. The positive breadth was confirmed by the fact that every market sector we regularly monitor closed in the green. The increase in yesterday’s volume confirmed the market’s solid gains, but the Nasdaq volume still came in 2% below its 50-day average level. Volume in the NYSE came in just above its 50-day average.

In yesterday’s Wagner Daily, we mentioned the broad market would soon make a big move out of the three-week trading range because volatility was contracting for so long. However, due to all the mixed signals, we simply did not know whether the move would come in the form of a rally or sharp selloff. Because each of the indices rallied and closed above their choppy trading ranges AND on higher volume, yesterday counts as a breakout day from which we may see a few more days of follow through in the major indices. Now that the broad market has broken out of the “chop zone,” let’s take a look at the daily charts to see where the next major support and resistance levels are. We’ll begin by taking a look at the broad-based S&P 500 Index:

On the chart of the S&P 500 above, notice how 1102 was the former resistance level, which was formed by both prior highs on the daily chart and resistance of the 20-day MA. Since the S&P rallied above this level yesterday, the 1102 area should now act as the new support because prior resistance becomes the new support once the resistance is broken. On the upside, 1116 will act as the next resistance, due to the 50-day MA. Next, take a look at the Dow:

The most important thing about the Dow is that it closed back above its 200-day MA, which has been acting as resistance since May 12. It also closed above resistance of its 20-day moving average, which was at 10100. Expect both the 20 and 200-day moving averages to now act as support, while the 50-day MA acts as resistance, near the 10252 level. Finally, take a look at the daily chart of the Nasdaq Composite:

Like the Dow, the Nasdaq also closed back above its 200-day MA, meaning that all three of the major indices are now back above their 200-day moving averages. For the Nasdaq, it was the first close above its 200-day MA since May 5. The 50-day MA on the Nasdaq is at 1971, while support of the 200-day MA is now at the 1952 area.

When the broad market rallies as sharply as it did yesterday, the next day is often marked by sideways consolidation near the highs. This means the major indices are likely to take a rest and trade in a narrow range today. This type of action would be bullish because the correction by time would enable the intraday moving averages to rise up and meet the price of the indices. Follow-through on yesterday’s gains would likely occur later this week. However, if the broad market sets new highs after the first 20 minutes of trading, there is a good chance we will see another uptrending day. Either way, all bets are off on the short side of the market right now. Because each of the indices are back above their 200-day moving averages, we strongly recommend you obey your stops on any remaining short positions you may have.

Today’s watch list:

There are no new plays for today, but gold and silver miners continue to show strength. You should be doing well with those if you bought them on our mention a few days ago.

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 = ($110)

Open Positions:

(none)

Notes:

We shorted DIA per yesterday’s newsletter, but covered quickly, before the initial stop, when we noticed market was reversing. This kept the loss small, despite the strong rally yesterday.

Edited by Deron Wagner,
MTG Founder and
President