The Wagner Daily | June 22, 2004

Commentary:

The broad market spent most of yesterday trading marginally higher, in an extremely narrow, sideways range, but a selloff during the last 90 minutes caused each of the major indices to close with moderate losses. Both the S&P 500 Index and Dow Jones Industrial Average closed 0.4% lower, while the Nasdaq Composite Index closed with a loss of 0.6%. Not surprisingly, volume declined by 25% in the NYSE and was 19% lower than the previous day in the Nasdaq. Even though the major indices closed with losses, yesterday was not technically considered to be a “distribution day” because the broad market closed lower, but also on lighter volume. As we mentioned in yesterday’s newsletter, we expect volume to remain light until the end of the month. Remember that June 30 is the deadline for the handover of Iraq, and is also the date of the next Fed meeting on interest rates. Furthermore, it is the end of the quarter, so we will probably see a lot of mutual fund “window dressing.” Based on these factors, there simply is no reason why institutions should be aggressively entering the markets right now.

Looking at the daily charts, the S&P 500 and Dow Jones both remain in a choppy, sideways range that has been in place for more than a week. However, yesterday’s selloff in the Nasdaq caused this index to close at a critical support level that, if broken, could trigger substantial selling. For that reason, we shorted QQQ (Nasdaq 100 Index) yesterday afternoon, as well as BBH (Biotech HOLDR), which triggered on the morning weakness. The weakness in the Nasdaq has been caused by the inability of the Semiconductor Index ($SOX) to sustain a rally. Further weakness is caused by the fact that the index remains below the upper channel resistance of its primary downtrend line, which has been in place since January 2004 (reference this chart from yesterday’s newsletter)

The Nasdaq Composite Index closed below its 20-day moving average, but right on support of its 50 and 200-day MAs. The Nasdaq Comp. rallied above its 200-day MA on May 25, but has tested it three times since the beginning of June. While the 200-day MA is a powerful support level, each subsequent test of support increases the odds of a break below the 200-day MA. If the Nasdaq Composite closes negative by more than 2 points today, it will have closed back below its 200-day MA, which is technically significant. Below is a daily chart of the Nasdaq Composite that illustrates this:

We shorted QQQ, which tracks the Nasdaq 100 Index, because it broke below support of its 20-day MA for the first time in nearly a month. We feel this may be the beginning of another leg lower in the Nasdaq, but we have a tight stop just in case we’re wrong, as often occurs when the market is chopping around on light volume. Below is a daily chart of QQQ:

With the exception of the Nasdaq, which is providing us with a short setup, the rest of the broad market is a choppy, sloppy mess. As long as volume remains light, continue to use caution with entering new positions. Remember there is absolutely nothing wrong with waiting 100% in cash for the next solid, low-risk opportunity to come along. The most profitable traders are the most disciplined ones.

Today’s watch list:

There are no new trade setups for today, but we remain short both QQQ and BBH from overnight.

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 = + $141

QQQ short (from June 21) –
shorted 36.33, stop 36.70, target 35.65, unrealized points = + 0.20, unrealized P/L = + $80

Notes:

We shorted BBH yesterday and, per intraday e-mail alert, shorted QQQ and took the full position (400 shares based on the MTG Position Sizing Model) overnight.

Edited by Deron Wagner,
MTG Founder and
President