The Wagner Daily | June 4, 2004

Commentary:

After beginning the day with an opening gap down, the broad market showed resilience and rallied throughout the morning session. By mid-day, each of the major indices had rallied to their intraday highs, but they ran out of gas upon running into resistance of the previous day’s closing prices. This caused another reversal in the afternoon that resulted in a selloff to new intraday lows, and each of the major indices eventually closed at their lows of the day. Both the S&P 500 Index and Dow Jones Industrial Average closed with losses of 0.7%, while the Nasdaq Composite Index once again showed the most relative weakness and closed 1.4% lower. Recurring weakness in the Semiconductor Index ($SOX), which we analyzed yesterday, was largely responsible for the enervative price action of the Nasdaq. The Nasdaq has lost a total of 1.5% during the past two days, but the SOX has shed 4.7% during the same period! The Internet Index ($GIN), which dropped 2.0%, was also a major drag on the Nasdaq yesterday. This, of course, enabled us to profit from weakness in the HHH short position, which we entered on June 2.

If you only looked at yesterday’s closing prices of the broad market and ignored the volume levels, you may have assumed the picture was pretty negative. But a closer look “beneath the hood” of yesterday’s action suggests the selling was rather mild because volume levels remained low. Total market volume in both the NYSE and Nasdaq was unchanged from the previous day’s levels, which is positive because it means we did not see an increase in institutional selling activity when the markets headed lower. When an index closes lower, but without an increase in volume, the index can easily bounce back the following day. Conversely, it would have been bearish if yesterday’s losses would have corresponded with a surge in volume. Breadth in the NYSE was negative, however, as declining volume outpaced advancing volume by a margin of 2.7 to 1.

Yesterdays’ selloff caused each of the major indices to drop back below their 50-day moving averages. But, given the gains we have seen since the lows of May, the correction should not have come as a surprise. Although the Nasdaq Composite Index broke below its 50-day moving average yesterday, it closed right on support of its 200-day MA, which it has been trading above since May 25. Interestingly, the 200-day MA also converges with the lower channel support of the uptrend that began with the low of May 17. On the daily chart below, notice how we have highlighted the 200-day moving average (purple line) convergence with support of the uptrend line (thick red line):

Because of this convergence of support, the Nasdaq should see a bit of strength today. This may be further aided by Intel’s mid-quarter update, which sparked an after-hours rally in the Semiconductor Index yesterday. However, without an increase in total market volume, any gains in the Nasdaq may be short-lived. Therefore, we recommend you continue to be vigilant with your stops and quick to take profits on the long side of the market.

Today’s watch list:

SMH – Semiconductor HOLDR
Long

Trigger = above 37.25 (above resistance of hourly downtrend line)
Target = 38.90 (resistance of prior high on daily chart)

Stop = 36.62 (below yesterday’s low)

Notes = SMH closed at support of its short-term uptrend line, as you can see on the chart above. With the support of the Nasdaq at its 200-day MA and uptrend line, along with the Intel after-hours action in the Semis yesterday, we believe the sector will reverse and rally over the next several days. Since SMH is gapping up in the pre-market, remember to use the MTG Opening Gap Rules before buying. This means we will wait for a break of the 20-minute high before buying the gap up.

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 = + $72

Open Positions:

unrealized P/L = + $85

Notes:

Per intraday e-mail alert, we covered half of the HHH short position for a profit, but took the remaining half position overnight. Stop has also been lowered on the remaining position, as per above.

Edited by Deron Wagner,
MTG Founder and
President