The Wagner Daily | August 12, 2004

Commentary:

A negative reaction to a quarterly earnings report from Cisco (CSCO) caused the Nasdaq to gap down and open below the previous day’s low, but the index found support in the late morning and spent the remainder of the day in a choppy uptrend. The Nasdaq Composite closed the day with a 1.5% loss, but also closed in the upper end of its intraday range. The index was actually down more than 2.6% within the first hour, but the gradual recovery throughout the day nearly cut that loss in half. Most of the non-technology related sectors fared much better yesterday, as the S&P 500 Index only lost 0.3% and the Dow Jones Industrials lost 0.1%. Medical and Pharmaceutical stocks fared the best and showed a lot of relative strength, which worked out well for the long position in PPH (Pharmaceutical ETF) we entered yesterday. As the tech sectors, such as Semiconductors ($SOX) and Networkers ($NWX), traded sideways throughout the entire day, the Pharmaceutical Index ($DRG) trended steadily higher.

Volume in the NYSE increased by 13% over the previous day, while volume in the Nasdaq increased 22%. However, despite the losses that occurred on higher volume, it’s not totally accurate to classify yesterday as a bearish “distribution day” because each of the major indices closed at or near their intraday highs. Most of yesterday’s losses were the result of a large opening gap down and initial selloff, as the remainder of the day was spent in an uptrend, albeit not a hugely impressive one.

Going into today, keep an eye on the same resistance levels we discussed in yesterday’s newsletter. As you may recall, the S&P 500 Index closed the previous day right at resistance of its prior low from July, around the 1080 area. Since the S&P 500 closed near the upper end of its range, but with a 0.3% loss yesterday, this same resistance area is in effect as we enter today’s session. Yesterday’s action was proof of the significance of that area of resistance, but we could see a decent rally if the index can push through it today. In that case, expect the next resistance to present itself at the 20-day moving average, around 1092. Just to refresh your mind, here’s another snapshot of that area of horizontal price resistance on the S&P:

Similarly, the Dow Jones Industrial Average ran into the same resistance level we discussed yesterday as well. Take a look:

The Nasdaq Composite probed below the lows of the prior three days, but closed above those lows. The index also formed a bullish “hammer” candlestick formation, which you can see on the daily chart of the index below:

Until the major indices can break the resistance levels illustrated above, caution remains in order on the long side of the market, especially in the tech stocks. However, we feel there is a good risk/reward in being long some of the Medical and Drug stocks and ETFs, just as long as you honor your stops. As for shorts, continue to trail stops lower on any open positions to protect against loss in the event of a broad-based short covering, which would likely occur if the S&P rallies above the 1080 level.

Today’s watch list:

There are no new trade setups for today, although we remain long PPH from yesterday’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 = + $82

Notes:

We entered PPH long and also raised the stop, as per above.

Edited by Deron Wagner,
MTG Founder and
President