The Wagner Daily | July 16, 2004

Commentary:

Yesterday was another day of indecision for the major indices, but a selloff into the close caused the broad market to register yet another day of losses. This time, however, the Nasdaq showed more relative strength than both the S&P 500 and Dow Jones Industrial Average. The Nasdaq Composite closed only 0.1% lower, but both the S&P and Dow closed 0.4% lower. Unlike the previous “distribution day,” volume declined by 21% in the Nasdaq and 3% in the NYSE. The recently ravaged Semiconductor (SOX) Index also closed marginally lower, but held above the previous day’s low.

If you have been actively trading the markets over the past two weeks, you don’t need us to tell you how erratic the broad market has been acting. Although it has been trending down, it certainly has not been the smooth type of downtrend in which you can simply initiate short positions and ride them lower. Instead, many days have been a wild ride filled with both rallies and selloffs, often several times within the same day. Much of the markets’ losses have been the result of opening gap downs rather than intraday selloffs. This, of course, has made it quite challenging for swing traders who profit from riding trends. If you have NOT been active in the markets over the past several weeks, you have not missed much, other than a large selloff in the SOX Index. Below is an hourly chart of the S&P 500 that illustrates how indecisive the index has been over the past week. Notice the roller coaster type action:

If you are astute, the chart above should be a clear warning to you against overtrading right now. We’ve been saying this for the past two weeks and the chart above confirms why we have been advising such caution. Unless you are daytrading and taking profits very quickly, the market action has just been too erratic to risk large amounts of capital. A picture is worth a thousand words, so enough said about that.

In the bigger picture, it’s important to note that the S&P 500 Index is nearing support of its 200-day moving average. The last time the index tested this key support level was in mid-May, and the 200-day MA ignited a rally that lasted a month. It is impossible to know whether we will see the same reaction the second time around, but we certainly would not be aggressively short near this key support level. If you’ve been short during the selloff of the past two weeks and have managed to ride out the intraday gyrations, kudos to you! But, consider using tight trailing stops at this point. As of yesterday’s close, the S&P 500 Index is now only 3 points above its 200-day MA. Take a look:

Conversely, the Dow Jones Industrial Average closed firmly below support of its 200-day moving average yesterday. There is now horizontal price support from last week’s low, around the 10,165 level, but the Dow is in trouble if it breaks that shelf of support. Such an event could trigger a selloff similar to that of the Nasdaq during the first two weeks of July.

Earnings season continues marching along and much of the market’s erratic nature can undoubtedly be attributed to the mixed reports we have been receiving. Dell had a positive report in today’s pre-market and actually raised their earnings guidance for the quarter. This has caused a bit of a bounce in the pre-market futures, so it will be interesting to see if the market is able to sustain its pre-market gains. So far, every rally attempt has been met with selling, but the markets are a bit oversold here. Just as stocks and indexes don’t go straight up without correcting along the way, remember that even weak markets will bounce along the way down. Given the proximity of the 200-day MA for the S&P 500, it would not be surprising if that bounce occurs today.

Today’s watch list:

There are no new plays for today, but we remain short HHH.

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 = ($90)

Open Positions:

unrealized P/L = + $92

Notes:

PPH was stopped out yesterday, but we remain short HHH, which is now “in the money.”

Edited by Deron Wagner,
MTG Founder and
President