The Wagner Daily | June 15, 2004

Commentary:

The major indices began the day with an opening gap down below the previous day’s lows, then spent the remainder of the day in a steady intraday downtrend. A small wave of buying interest during the final 45 minutes of the day enabled the broad market to close above its intraday lows, but still with moderate losses. Once again, the tech-related sectors of the Nasdaq Composite Index showed the most relative weakness, as the index closed with a loss of 1.5%. The S&P 500 Index closed 1.0% lower, while the Dow Jones Industrial Average showed resiliency and closed only 0.7% lower. Yesterday’s selling was broad-based, and every sector except the Biotechs ($BTK), which sold off ahead of the broad market last week, closed in the red. Selling was most prevalent within the Internet ($GIN) and Semiconductor ($SOX) indexes, as well as the small cap stocks. HHH (Internet HOLDR ETF), which we shorted on June 9, hit our original price target yesterday, so we covered for a profit of nearly 2 points.

Negative breadth figures confirmed yesterday’s broad-based weakness, as declining volume outpaced advancing volume by a margin of 6 to 1 in the NYSE and 3 to 1 in the Nasdaq. Total market volume was 2% lower in the NYSE, but was 4% higher in the Nasdaq. Because the Nasdaq closed negative AND on higher volume, yesterday was technically a bearish “distribution day.” However, given how light volume was the previous day, the 4% increase in volume was hardly significant. To put the recent trend of disappearing volume into perspective, consider the following: Total market volume in the NYSE has remained approximately 15 – 20% below its 50-day average level for the past two weeks, and yesterday was the twelfth consecutive day that volume in the NYSE has come in below its 50-day average level.

Yesterday’s sell-off caused both the S&P 500 and Nasdaq Composite to close at key support levels. Although the Nasdaq closed below its 50-day moving average yesterday, it found support and closed just above the extremely important 200-day moving average. As we have explained many times in the past, the 200-day moving average is a closely-watched indicator because it shows the direction of the “long-term” trend in an index or stock. In yesterday’s newsletter, we illustrated how the Nasdaq Composite failed to close last week above its primary downtrend line, which began in January of 2004. However, the fact that the index held above its 200-day MA yesterday is bullish. The daily chart of the Nasdaq illustrates how the index closed below its 50-day MA (red line), but above its 200-day MA (thick, purple line):

The current support level of the S&P 500 Index is less obvious because it did not close at any key moving averages. However, recall that, on June 7, the S&P 500 Index rallied and closed above resistance of its primary downtrend line that was in place since the high of March 5. This was bullish for the index because it represented the break of a technical downtrend that was in place for 3 months. As you probably know, the most basic tenet of technical analysis is that prior resistance becomes the new support level once the resistance is broken. This simply means the prior trendline resistance on the S&P 500 Index should now act as the new support level, which is exactly what happened yesterday. On the chart below, notice how the S&P 500 found support when it sold off down to support of the trendline that was formerly acting as resistance:

We mentioned yesterday that the major indices are stuck in an intermediate-term trading range, which means we are likely to see choppy action over the next several weeks. While this remains true, we feel that yesterday’s light-volume correction may enable the broad market to rally over the next several days. When you consider that the Nasdaq closed at support of its 200-day moving average and the S&P 500 closed above support of its prior downtrend line, these two factors may give us a low-risk entry point on the long side of the broad market ETFs. If the indices fail to hold at these key support levels, you can quickly close your long positions with a small loss. But if the 200-day MA and support of the prior downtrend line continue to “do their thing,” it will enable you to position yourself on the long side of the market at relatively good prices. On a side note, be aware that key economic data, including PPI and CPI, will be released before the market opens today. Because volume has been so light, odds are good that any price reactions to the data may be exaggerated in both directions.

Today’s watch list:

DIA – DIAMONDS (Dow Jones Indu. Avg. Tracking Stock)
Short

Trigger = below 103.43
(below the 200-MA/15 min.)
Target = 101.40 (just above the 200-day MA support)

Stop = 104.12 (above yesterday’s high)

Notes = The Dow closed below support of its primary downtrend line that was broken last week, so we are looking for further follow-through to the downside. Target is near the 200-day MA.

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

Open Positions:

(none)

Notes:

We took profit and closed the HHH short position yesterday, so were flat overnight.

Edited by Deron Wagner,
MTG Founder and
President