The Wagner Daily | July 28, 2004

Commentary:

For the first time since June 30, nearly one month ago, the Nasdaq Composite Index closed higher AND on higher volume yesterday. Both the S&P 500 Index and Nasdaq Composite Index spent the first half of yesterday oscillating in the upper half of their respective ranges of the previous day, but buyers stepped in during the final ninety minutes of trading and pushed each of the major indices to close near their intraday highs AND above their highs of the previous day. The Nasdaq, which has suffered the worst of the losses this month, led the broad market higher and closed with a 1.6% gain yesterday. The S&P 500 Index gained 1.0%, while the Dow Jones Industrials bounced 1.2% higher.

More important than yesterday’s percentage gains is that the gains occurred on increased volume in the broad market. As of mid-day, it looked like the Nasdaq was going to close higher, but volume was once again registering below the previous day’s level. However, volume increased when the buyers stepped in at 2:30 pm EST, which enabled the Nasdaq to close higher and on volume that was 6% higher than the previous day. This means that yesterday was technically an institutional “accumulation day,” the first we have seen in the Nasdaq since June 30. Volume in the NYSE also increased by 14%, which means the S&P and Dow also showed signs of accumulation. Because the indices have been so “oversold,” we were not surprised to see the broad market close higher yesterday. But the pleasant surprise for the bulls was that the gains occurred on volume that was higher than 50-day average levels, and was also higher than the previous day.

While yesterday’s “accumulation day” was encouraging, we can hardly say the broad market is in a healthy condition. Despite yesterday’s gains, the Nasdaq Composite is still down 8.7% for the month and 13% below its high of January 2004. This month alone, there have been at least seven “distribution days” in which the Nasdaq closed lower, but on heavier volume than the previous day. Obviously, it would take a lot of buying volume in order to rally higher and through the overhead supply that was created by this month’s losses. Given that we are in a seasonally slow time of year, the buyers are not likely to show up in mass quantities. While the major indices may be putting in a short-term bottom, the most likely scenario is that we will see a “correction by time,” which occurs when an index trades sideways in a narrow range. This enables the daily moving averages to descend to meet the price of the index, rather than the index rallying up to meet the moving averages. If this occurs at the bottom of a downtrend, it is bearish. But, how you can be sure we are not putting in a longer-term bottom that presents a real buying opportunity? Well, the first thing to do is take a look at the upper channel of the downtrend lines that have formed on the daily charts of the major indices.

As of now, yesterday’s broad market rally was simply a technical bounce within the context of a primary downtrend. But, the major indices are likely to test resistance of the upper channel of their downtrend lines within the next few days. This downtrend line can be illustrated by drawing a descending line from the highs of June 30, connected with the “swing highs” of July 21. In doing so, you will see the next key resistance point the major indices will encounter. We have annotated the respective downtrend lines on daily charts of the S&P 500 Index, Nasdaq Composite Index, and the Dow Jones Industrial Average below:

As you can see, each of the major indices are clearly still in a downtrend that would only be broken if the major indices close firmly above the downtrend lines annotated above. Until the market proves otherwise, however, we must assume that the current downtrend will continue. Consider using a rally into the downtrend line as a chance to sell any long positions you are stuck with and/or to initiate new short positions. Of course, if the downtrend lines are broken, it would be wise to quickly cover your short positions, especially if we see a few more “accumulation days.”

There is nothing wrong with “dipping a toe in the water” to test the long side of the market, but make sure you are doing so in sectors that are showing relative strength to the broad market. One such sector to consider on the long side is the Telecom Index ($XTC), which has been very strong for the past week. If you’re interested, TTH is the ETF that tracks the index. If buying the broad-based ETFs such as SPY, DIA, or QQQ, it would also be wise to reduce your position size until the indices prove they can break above resistance of their primary downtrend lines, at which point you could add to your winning positions. Remember that the difference between a break-even trader and one who is consistently profitable is often only a matter of how each trader manages position sizing.

Today’s watch list:

SMH – Semiconductor HOLDR
Long

Trigger = above 32.04 (above yesterday’s high and hourly downtrend line)
Target = 33.55 (resistance of the prior “swing high”)
Stop = 31.30 (below yesterday’s close)

Notes = Just like last time, we are looking to play a short-term bounce in the Semiconductor index, but only after SMH confirms it has put in a short-term bottom. This would occur on a break above yesterday’s high, which also converges with the hourly downtrend line (see chart above).

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 = ($82)

Open Positions:

(none)

Notes:

DIA hit our stop yesterday, so we are now flat.

Edited by Deron Wagner,
MTG Founder and
President