The Wagner Daily


The major indices closed higher last Friday, but volume declined to lethargic levels. Strength in the Semiconductor Index enabled the Nasdaq Composite Index to close with a 0.9% gain, while both the S&P 500 and Dow Jones Industrial Average closed 0.5% higher. However, volume in the NYSE declined by 12% and was the second lightest volume day of the year (the lightest was only a few days prior). Volume in the Nasdaq dropped by 7%. The lack of volume prevented the major indices from closing strong, though the selling was not heavy. Each of indices gave back half their intraday gains during the afternoon and also closed at their intraday lows, which usually does not bode well for the next day. While the broad market closed higher last week, it’s hard to have much conviction when you’re dealing with minimal volume levels that are typically seen around major holidays such as Christmas.

Because volume has been so light over the past several weeks, the daily charts of the major indices are showing indecisive and choppy price action. For example, an index rallies above a key moving average one day, sells off below it the next, then gaps up above the high the following day. This type of price action is a common result of light volume markets in which neither the bulls or bears are taking an aggressive stance. So, rather than trying to predict what will occur within the next few days, let’s take a look at some longer-term charts of the broad market, which will show us the “big picture” of what is happening now. We’ll begin by looking at a weekly chart of the S&P 500 Index, going back to the beginning of this year:

As you can see, the S&P 500 Index has been in a clearly defined downtrend since the beginning of March 2004. Since the high of March 5, the S&P has formed two “lower lows” and two “lower highs,” as we have circled on the chart above. This, of course, meets the technical definition of a downtrend. The upper channel resistance of this primary downtrend line is illustrated as a thick red line above. The S&P 500 attempted to rally above this downtrend line last week, but was unable to close above it. Therefore, the downtrend that began in March is still intact as we enter this week. In fact, the weekly downtrend will technically remain intact unless the index rallies above its prior high, around the 1,145 to 1,150 area. The one positive, however, is that the S&P 500 remains above support of its 200-week moving average (the purple line). The Nasdaq Composite Index has been in a similar downtrend that began in January of 2004. Take a look:

It’s quite evident, based on the weekly charts above, that the S&P 500 has been in a downtrend since March, while the Nasdaq Composite has been trending lower since January. But, what happens if you look at even longer-term charts? Does the picture look any better? Unfortunately, no it does not. In our opinion, the technical picture of the past 4 years looks pretty bad. Take a look at the monthly chart of the S&P 500 below:

The chart above illustrates that the S&P has been in a primary downtrend since the all-time high that was set in March of 2000. It trended lower for 3 years, from March of 2000 through February of 2003, then rallied for 1 year, from March of 2003 through March of 2004. Curiously, the high of the rally that ended in March of 2004 perfectly coincided with the 50% price retracement from the March 2000 high down to the March 2003 low (click here for a brief explanation of Fibonacci retracement levels). As you may know, any trend (either up or down) is likely to continue whenever the retracements do NOT exceed 50%, which this retracement has not. Therefore, it is our contention that the 1-year rally that occurred from March of 2003 through March of 2004 was simply a technical bounce within the context of a longer-term downtrend (bear market). Of course, a rally above the March 2004 high would invalidate this analysis, but the index has a long way to go in order to do that.

The intention of our long-term analysis above is not to scare you out of long positions or to convert you to a bear. We simply want to make sure you do not blindly get caught up in the financial media frenzy that we have seen proclaiming the excellent state of the U.S. economy. Remember that charts don’t lie. . .ESPECIALLY long-term ones. When you consider that the rally from the March 2003 low was largely driven by record low interest rates and excess Fed liquidity, the picture seems even more bearish. But, this does not mean the market will collapse within the next few days, weeks, or even months. Corrections in bear markets can last a long time, but just don’t lose sight of the “big picture.”

Today’s watch list:

(There are no new plays for today, though we remain long partial position of SMH.)

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:

    SMH (HALF position, from June 4) –
    bought 37.45, sold 37.75, points = + 0.30, net P/L = + $42

    HHH short (HALF position, from June 2) –
    shorted 60.15, covered 60.22, points = (0.07), net P/L = ($9)

Open Positions:

    SMH (HALF position, from June 4) –
    bought 37.45, new stop 37.85, unrealized points = + 0.05, unrealized P/L = + $7


We sold half of SMH to lock in gains on Friday, but took the remaining shares over the weekend. Due to today’s pre-market gap up, we have raised the stop on SMH, as per above.

Edited by Deron Wagner,
MTG Founder and