The Wagner Daily | August 3, 2004

Commentary:

The major indices began yesterday with an opening gap down, but gradually recovered throughout the day to close in positive territory. At its intraday low, which was set during the first hour of trading, the Nasdaq Composite was trading 1% lower, but the index quickly found support and eventually rallied to close with a 0.3% gain. Both the S&P 500 Index and Dow Jones Industrial Average showed relative strength to the Nasdaq, and both indices closed 0.4% higher. Volume in the NYSE declined by 2%, while the Nasdaq volume rose by 1%. Because the Nasdaq closed higher and on higher volume, yesterday was technically a bullish “accumulation day” in the index, the second one since the current rally began on July 27. However, a mere 1% increase in volume is not very impressive.

Yesterday marked the fifth consecutive day of gains for the S&P 500, although we have yet to see the type of strong volume that would indicate institutional backing. Regardless, the S&P closed above resistance of it daily downtrend line yesterday, while the Nasdaq closed above its prior downtrend line for the second consecutive day. While it is bullish that the S&P has closed above its primary downtrend line, the index also closed just below resistance of its 200-day moving average. An index rarely pushes through resistance of a 200-day moving average on its first attempt, so it will be interesting to see how the broad market reacts to this key resistance level. The daily chart of the S&P 500 below illustrates the break of the prior daily downtrend line, but resistance of the 200-day MA just overhead:

Interestingly, the Nasdaq found support during yesterday morning’s weakness because it sold off down to support of its prior downtrend line. This is a good example of the most basic tenet of technical analysis; prior resistance becomes the new support level after the resistance is broken. On the daily chart below, notice how yesterday’s intraday low coincided with support of that prior downtrend line:

Aside from the charts, consider for a moment the fact that the major indices closed positive and shrugged off the upgraded terror alert that was issued over the weekend. In trading, it is not the actual news that matters, but how the market REACTS to the news is the important thing. If a market shows gains in the face of “negative” geopolitical news, this is considered to be bullish. Conversely, bearish markets will often go lower in the face of “positive” news. Although it may seem like a subtle issue, we feel that yesterday’s positive closing prices, despite the heightened terror alert, may indicate a change to a positive sentiment in the markets.

With both the S&P and Nasdaq above resistance of their prior downtrend lines, we recommend caution on the short side of the market now. We are not incredibly excited about entering new long positions either, but we feel a mix of long and short positions is probably the safest bet right now. In the Morpheus Capital hedge fund, we are currently positioned exactly that way because we are short weak sectors like the Internet stocks, while simultaneously being long the Semiconductors, which are beginning to see positive money flow.

Today’s watch list:

There are no new plays for today, although we remain long half position of SMH and 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:

(none)

Open Positions:

unrealized P/L = + $187

HHH short (from Aug. 2) –
shorted 53.88, stop 55.20, target 51.25, unrealized points = (0.43), unrealized P/L = ($86)

Notes:

We remain long SMH, but have tightened the stop again. We are also short HHH per yesterday’s entry.

Edited by Deron Wagner,
MTG Founder and
President