The Wagner Daily | August 17, 2004

Commentary:

After closing near fresh one-year lows last Friday, the Nasdaq staged a “relief rally” yesterday and gained a commendable 1.5%. However, volume in the index came in below average levels and was 4% below the previous day’s level. Both the S&P 500 and Dow Jones Industrial Average also turned in solid performances, as each index closed 1.3% higher. Volume in the NYSE was 3% higher than the previous day, which technically made yesterday a bullish “accumulation day,” but volume was still below its 50-day average level. While the percentage gains were a pleasant change of pace yesterday, the broad market continued to lack the type of volume surges that would represent the return of institutional buying interest.

Last week, we discussed how the 1080 level was acting as a key resistance level on the S&P 500 Index, and it appears that same level was a factor that limited yesterday’s gains as well. As you may recall, the 1079 – 1080 area represents resistance from the prior low that was established in July. Furthermore, additional overhead supply and resistance was created at this price level when the S&P 500 attempted, but failed, to rally above that same level last week. The red horizontal line on the daily chart of the S&P 500 Index below illustrates how the rally ran out of gas at this same level yesterday:

If the S&P 500 manages to rally above the horizontal resistance at 1080 today, it will again run into resistance of its primary downtrend line (the blue descending line on the chart above). So, don’t get too bullish on the broad market just because the S&P rallies above 1080. A much more important area of resistance will be that downtrend line because it has been intact for more than six weeks. Until the market proves otherwise, it is wise to assume the S&P will head back down after running into the downtrend line and resume the direction of its current trend. Only a high volume, confirmed break above that downtrend line would cause us to have a slightly more bullish stance on the intermediate-term direction of the market. So, watch those two key areas of resistance going into today.

Similarly, be aware of the downtrend line on the Nasdaq Composite, which is likely to act as resistance around the 1820 area. Above that, resistance of BOTH the 20-day moving average AND the 200-WEEK moving average converges around 1836. As we advised with any further rally attempt in the S&P, consider using a rally into the downtrend line as a chance to sell long positions UNLESS the index powers through its downtrend line on high volume. Here’s the downtrend line on the Nasdaq:

We are well positioned to take advantage of rallies in both the S&P 500 and Nasdaq Composite, as we remain long both PPH (Pharmaceutical HOLDR) and SMH (Semiconductor HOLDR), both with unrealized gains. As usual, we will simply trail a stop to lock in profits, but also maximize the gains. If you want to know if yesterday’s rally attempt will have legs, watch today’s volume for clues. A positive day on higher volume today would be bullish and count as a follow-through day.

Today’s watch list:

There are no new plays, but we remain long both PPH and SMH.

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 = + $105

SMH long (from Aug. 16) –
bought 29.10, new stop 28.55, target 31.30, unrealized points = + 0.01, unrealized P/L = + $2

Notes:

We remain long both SMH and PPH. Note the new stops above.

Edited by Deron Wagner,
MTG Founder and
President