The Wagner Daily | June 28, 2004

Commentary:

The major indices wrapped up an overly bullish week with a mixed performance on Friday, as the S&P 500 Index closed 0.5% lower, but the Nasdaq closed higher by the same percentage. The Dow Jones Industrial Average showed the most relative weakness and closed with a loss of 0.7%. For the week, the S&P 500 closed flat and the Dow closed 0.4% lower. However, the Nasdaq Composite diverged sharply and closed 1.9% higher. The Nasdaq also closed the week above a downtrend line that had been in place for six months. Clearly, the action was in the Nasdaq last week, and we profited from Nasdaq-related stock trades in the MTG Intraday Real-Time Room and ETFs that were called in the Wagner Daily. We remain long SMH (Semiconductor HOLDR), which we entered on June 23, because we anticipate further strength in the Nasdaq, and especially the Semiconductor ($SOX) Index.

Friday’s volume numbers were a bit deceiving. The Nasdaq’s volume came in 41% higher, while the NYSE volume increased by 28% over the previous day. However, the large volume spike was attributed to the annual Russell 2000 small-cap rebalancing, which took place during the final five minutes of Friday’s session. Volume ran slightly lower the entire day, until that spike at the end of day. So, don’t get too excited about the volume increase. Nevertheless, volume remained strong into the end of last week, and came in above its 50-day average levels for three consecutive days. Last week also saw two consecutive “accumulation days” in the Nasdaq, and two days in which the Nasdaq closed slightly lower, but on lower volume. This is the way a healthy market should act, and it was the first time in months when we had a bullish price-volume relationship that lasted more than a day.

The S&P 500 Index has been trading above the prior resistance of its former primary downtrend line that was broken on June 7. However, the index continues to have difficulty rallying above the 1,146 level, which was the last high that was set when the S&P was in a downtrend. While the ability to hold above the prior downtrend line is bullish, the S&P will not be in a confirmed uptrend until it sets a “higher high” and closes above the 1,146 area. The S&P 500 Index tried to close above the 1,146 area for the past three consecutive days, but has been unable to do so. The daily chart below illustrates this key resistance level of the prior high. We removed the moving averages so that you can more easily see the horizontal price resistance:

Going into today, the 1,146 area remains the obvious resistance level to monitor. If the S&P can close above that level, and does so on high volume, it will be a bullish signal that will confirm an intermediate-term trend reversal. However, the longer the index remains below the prior high of 1,146, the more likely it will weaken and move lower. If this occurs, expect the S&P to find its next major support at the 1,124 level, which was last week’s low, and then at the 1,119 area, which is the 50-day moving average (not illustrated above).

The Nasdaq Composite Index closed last week above resistance of its primary downtrend line, that was in place since January of 2004. The weekly chart of the Nasdaq below illustrates this break of trendline resistance:

Needless to say, this weekly close above a downtrend line that was in place for 6 months is quite bullish and indicates an important change in sentiment. Barring any major surprise with interest rate changes during Wednesday’s FOMC meeting, the Nasdaq should follow through with more strength in the coming week. As for support, the prior resistance of the downtrend line should now act as the new support, right at the 2,000 level. Below that, expect the 1,965 to 1,980 area to provide support due to the convergence of several important moving averages.

As you probably already know, the U.S. handed over sovereignty to Iraq today, two days ahead of the June 30 deadline. This surprise move is being interpreted by the markets as a positive event and has caused a solid gap up in the pre-market S&P and Nasdaq futures. As always, use the MTG Opening Gap Rules, which basically means we will wait to see if the gap holds into the first reversal period at 9:50 am EST. If it does, any rally to a new intraday high after the first 20 – 30 minutes of trading is probably buyable because the gap is likely to hold. However, use caution with blindly buying the opening gap because the gap could easily fail due to the 1,146 resistance on the S&P that we discussed above.

Today’s watch list:

Due to the large pre-market gap in the futures, there no new plays for today. However, we remain long SMH from June 23. We also have positions in the gold stocks, which we discussed as having broken out last Friday.

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 = + $99

Notes:

We remain long SMH with tighter stop of 36.90.

Edited by Deron Wagner,
MTG Founder and
President