The Wagner Daily


The major indices began last Friday on a positive note due to raised earnings guidance from Dell Computer, but the broad market once again fell victim to higher volume selling and closed lower across the board. Making the picture a bit worse was the fact that the major indices also each closed at their intraday lows. The Nasdaq Composite Index trended steadily lower throughout Friday’s session and closed with a 1.5% loss on volume that was 7% higher than the previous day. It was the third consecutive day the Nasdaq closed on volume that was greater than its 50-day average. But, unfortunately for the bulls, each of those three days were also “distribution days,” which occur when an index closes with a loss AND on higher volume than the previous day. The losses were much less pronounced in the Dow Jones Industrial Average, which only closed 0.2% lower. The S&P 500 Index closed with a loss of 0.5%. Volume in the NYSE increased by 3%, which made Friday a distribution day for the S&P and Dow as well. Thanks to the Nasdaq’s weakness, we now have an unrealized gain of more than 2 points in our HHH short position, which we entered on July 13.

If you’ve been following the markets in the slightest bit, I’m sure you know the Nasdaq has just been getting absolutely destroyed lately. It’s not just the absolute percentage losses that have made the picture so bearish, but it’s the fact that the losses keep occurring on increasing volume, which is always a sure sign of institutional selling. Unfortunately, the Nasdaq is going to have a very difficult time registering any significant gains in the short-term because it would take an immense amount of new buying interest in order to overcome the overhead supply caused by the institutional selling over the past few weeks. Although we study charts religiously, simply paying attention to the markets’ price to volume relationship can give you a “big picture” sense of what is happening. Knowing that more than 50% of the Nasdaq’s daily sessions this month were “distribution days” tells me more about the health of the market than any chart ever could.

Fortunately, there is a possible light at the end of the tunnel for the Nasdaq as we enter the new week. The bright spot comes in the form of the Nasdaq’s 200-week (NOT day) moving average, which is immediately below last week’s closing price. Take a look:

As you know, the 200-day moving average is typically a very powerful support or resistance level in technical analysis, which makes the longer-term 200-week moving average even more significant. The 200-week MA is currently at 1,878, which is only 5 points below last week’s close of 1,883. Although the Nasdaq could easily probe a few points below that level over the next few days, there is a good chance the moving average will provide support. Furthermore, the prior significant low of 1,865, which was set on the week ended May 21, 2004, should provide solid price support as well. If, however, the Nasdaq fails to bounce off the 1,865 level, look out below! A break below that level would represent a new low of the calendar year and would undoubtedly trigger more selling.

While the Nasdaq has support of its 200-week moving average below, the bad news is that the S&P 500 Index closed below its 200-day moving average for the first time since April 16, 2003. The daily chart of the S&P 500 Index below illustrates this:

The S&P 500 Index tested its 200-day moving average in May of 2004, but only on an intraday basis. Note that it never actually closed below it during that time. Obviously, one day below a moving average does not represent a confirmed break of support, but it is important to keep a close eye on. If the S&P fails to get back above the 200-day MA within the next 2 – 3 days, we could see a big wave of selling hit the index. Most likely, money would flow out of the S&P related sectors and stocks and back into the Nasdaq, which sold off ahead of the S&P. This type of sector rotation is quite common when one index gets out of sync with another.

Given the incredibly bearish action of the past three weeks, it is safe to say the market is beginning to look quite oversold. However, the same thing could have been said a week ago, when each of the indices were trading much higher. Therefore, it would be quite risky to begin buying stocks or ETFs now without any confirmation that the market is ready to reverse. Conversely, it would be wise to protect any profits you may have on short positions by trailing your stops lower, which would automatically enable you to lock in gains if the market bounces hard. Looking at the charts, I have a difficult time saying that now is the time to enter new short positions if you are not already short. While the indices may trade lower, it now comes down to a matter of where your risk/reward ratio lies. It seems that the potential risk of a reversal from oversold levels is greater than the potential reward if the market goes lower for another day or two. But, if you trade on a very short time frame, such as intraday, then there is nothing wrong with entering new shorts right now, just as long as you are disciplined enough to immediately close your position if necessary.

Today’s watch list:

PPH – Pharmaceutical HOLDR

Trigger = above 75.73 (above Friday’s high)
Target = 78.20 (resistance of the 200-day MA)
Stop = 74.75 (below Friday’s closing price)

Notes = We took a shot at PPH last week, but were probably a few days early, as PPH has now come into prior support from its March low. We feel this should cause a tradeable bounce to the long side on PPH, but we certainly are not bullish on the sector for anything more than short-term. Confirmation of the reversal would be a trade above Friday’s high. Since PPH sometimes has a wide spread, remember you can track the price of PPH by following its index instead, which is $IPH.X.

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:


Open Positions:

    HHH short (from July 13) –
    shorted 57.48, new stop 57.45, target 52.20, unrealized points = + 2.04, unrealized P/L = + $408


HHH weakness on Friday put the position more than 2 points “in the money,” so we are trailing our stop down to the break-even point.

Edited by Deron Wagner,
MTG Founder and