The Wagner Daily | July 20, 2004

Commentary:

As expected, the 200-week moving average began to show signs of support on the Nasdaq Composite Index, which broke its 5-day losing streak yesterday. At its intraday lows, the Nasdaq was trading 0.7% lower, but mild strength in the afternoon enabled the index to close flat. Volume in the Nasdaq was 1% lower than the previous day. Like the Nasdaq, the S&P 500 Index also closed flat after recovering from a small intraday loss. Weakness in the blue chip stocks caused the Dow Jones Industrial Average to close with a 0.5% loss. Volume dropped off 9% in the NYSE, which was positive considering the Dow closed lower.

Of all the major industry indexes, the CBOE Internet Index ($GIN), which closed 2.4% lower, was among the biggest losers yesterday. Since its peak on June 30, the $GIN has lost 14.7% of its value. From its low of October 2002 to its peak in June 2004, the index has gained an astronomical 195%, so a 15% correction should hardly come as a surprise. Needless to say, we realized a solid profit of approximately 3 points on the HHH (Internet ETF) short position that we entered on July 13 and covered yesterday. It’s great to be a short-term trader who can profit from both sides of the market, especially because indexes often drop much harder and faster than they go up. Kudos to subscribers who profited from this trade.

Yesterday’s loss in the $GIN put the index well below support of its 200-day moving average, which will now act as resistance on any rally attempts. The primary uptrend line from the March 2003 low has now been broken in this formerly market-leading sector, but support of the uptrend line from its October 2002 low is still well below yesterday’s closing price. The weekly chart of the Internet Index below illustrates both the prior uptrend line (in red) and the longer-term trendline (in blue), which began with the low of October 2002. We removed the moving averages so that you can more easily see the trendlines:

Although we feel the index is headed lower over the next several weeks, we covered the HHH short position yesterday because the Nasdaq is so oversold. The Internet Index is now “out of sync” with the Nasdaq, as it held up when the Nasdaq was dropping hard, but is now selling off as the Nasdaq is trying to find support. When this happens, it often makes it a bit tricky to stay with a winning position because the broad market can push the index in the opposite direction. Therefore, we feel it is safer to wait for the next bounce in the index and re-enter the short position at potentially a better price.

Interestingly, the Nasdaq reversed yesterday after coming within 5 points of its prior low from May 2004 that we discussed in yesterday’s Wagner Daily. Yesterday’s intraday low also coincided with the 200-week moving average, which is only a couple points above that same prior low. The chart below illustrates the potential double bottom at the prior low, as well as the 200-week MA support:

While it was encouraging to see mild strength and a flat close in the Nasdaq, we are hardly “out of the woods.” The distribution volume of the past several weeks will be very difficult to overcome, so the Nasdaq is not likely to rally very far unless high volume suddenly steps in from nowhere. A more likely scenario is a choppy, sideways correction by time, the type that is always challenging to trade. While the Semiconductor Index may find short-term support here, both the Internet and Biotechs indexes look poised to go lower, which would obviously be a drag on the Nasdaq. Unfortunately for the bulls, the picture does not look much brighter in the S&P 500 or Dow Jones, both of which are now below their 200-day moving averages as well. This means that caution continues to be warranted on the long side of the market, as we await the broad market’s next move. As always, remember to “Trade what you see, not what you think!”

Today’s watch list:

SMH – Semiconductor HOLDR
Long

Trigger = above 32.55 (above yesterday’s high)
Target = 33.50 (resistance of the July 14 gap down)
Stop = 32.10 (below yesterday’s closing price)

Notes = Just looking to play a bounce in the badly beaten down SOX index. However, notice we will only buy if it confirms a bounce by trading above yesterday’s high. We are not trying to pick a bottom in the index, but just trading a short-term bounce, if it comes.

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 = + $580

Open Positions:

Notes:

We incrementally covered our HHH short position using trailing stops yesterday. We are now flat.

Edited by Deron Wagner,
MTG Founder and
President