The Wagner Daily | July 26, 2004

Commentary:

The broad market concluded an ugly week with more losses during last Friday’s session, as gains from the previous day’s lighter-volume bounce were quickly undone. Both the S&P 500 Index and Dow Jones Industrial Average closed above their respective intraday lows of the previous day, but still closed at their lows of the week. The Nasdaq Composite Index showed relative weakness because it closed below the previous day’s low. The Nasdaq suffered a 2.1% drop on Friday, which caused the index to close the week 1.8% lower. The S&P 500 and Dow Jones Industrials both lost approximately 1.0% on Friday and closed the week down 1.3% and 1.7% respectively. The one positive of Friday’s session was that total volume in the NYSE declined by 14%, while volume in the Nasdaq was 20% lighter than the previous day. After last Wednesday’s heavy day of distribution, the fact that Friday’s losses occurred on lighter volume should have provided a bit of relief to the bulls.

With only one week remaining in the month of July, it has, thus far, been a wicked month for the bulls. The Nasdaq Composite, for example, has closed lower during the past four consecutive weeks and is down 9.7% on the month! Going into the beginning of last week, it appeared as if the Nasdaq may have been positioned to rebound a bit. However, the index closed the week below support of its 200-week moving average and its prior low from May, both of which we have been discussing extensively. The daily chart of the Nasdaq below illustrates last week’s close below its prior low from May. Notice also how the selling really picked up momentum after the Nasdaq broke below support of its 200-day moving average on July 6:

Long-time subscribers to this newsletter know that we often use Fibonacci retracement levels in order to predict major support or resistance levels after horizontal price support or resistance is broken. Since the May low was broken, we can use Fibonacci to predict the next area of major support in the Nasdaq, which is at the 1,807 area. This is derived from the 38.2% Fibonacci retracement from the low of March 2003 to the high of January 2004. As we mentioned a few weeks ago, we continue to believe the Nasdaq will soon test this area of support:

Going into this week, our eyes will be on the S&P 500’s prior intraday low of 1,076, which was set on May 12. As the index only closed 10 points above that level last week, odds are pretty good we will at least see a test of that support level within the next few days. If the Nasdaq remains below its prior low, it will be very difficult for the S&P 500 to remain above its prior May low for more than a week or so. The S&P 500 has closed lower for the past six consecutive weeks, but the technical picture still looks a bit better than the Nasdaq:

If you’re losing money in the current environment, consider the possibility that perhaps you have fallen in love with the long side of the market, rather than participating on the short side as well. Remember that the biggest benefit of being a short-term trader, as opposed to a long-term “investor,” is the fact that we can look to profit from both sides of the market. For the month of July, we have netted a gain of 6.78 points from the sum of all ETF trades called in the Wagner Daily. Based on the MTG Position Sizing Model, this equates to a net profitable return of 4.54% of our model account of $25,000. While not easy by any means, it’s a great feeling to make 4 or 5% in a month when the Nasdaq is down nearly 10%. We hope you have been profiting this month as well, or, at the very least, maintained a focus on capital preservation.

Today’s watch list:

There are no new plays for today, although we remain short DIA from Friday’s entry.

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 = + $30

Notes:

Per last Friday’s Wagner Daily, we are short DIA. Note the new stop above.

Edited by Deron Wagner,
MTG Founder and
President