The Wagner Daily | October 4, 2004

Commentary:

The major indices gapped up sharply last Friday, rallied steadily higher throughout the day, and closed at their highs of the session. The Nasdaq Composite led the charge and tacked on an impressive 2.4% gain. Both the S&P 500 and Dow Jones Industrial Average followed suit and closed higher by 1.5% and 1.1% respectively. The tech sectors shined the most, as the Semiconductor Index ($SOX) surged 4.6% higher and the Software Index ($GSO) gained 4.1%. Interestingly, SMH (Semiconductor HOLDR) and SWH (Software HOLDR), both of which we had long positions in, were the two highest percentage gainers of all the ETFs that MTG tracks. As such, we realized quite a nice gain from those two positions on Friday.

More important than the percentage gains is the fact that strong volume in both the NYSE and Nasdaq also confirmed the broad market’s sharp rally. Volume in the Nasdaq once again increased, this time by 9% over the previous day. It was also the highest volume day in the Nasdaq since July 28. Friday was not only the fourth consecutive day of gains in the Nasdaq, but was also the fourth consecutive “accumulation day.” This means that volume has increased on each of the past four days in which the Nasdaq has closed higher. Volume in the NYSE dropped by 9.4%, but was actually higher if you factor out the monstrous volume increase of 140 million shares that Merck accounted for the previous day. Overall, the broad market showed the most bullish performance we have seen in months because the intraday uptrend was quite smooth, the gains were broad-based, and volume was excellent!

Looking at the daily chart of the Nasdaq Composite, you will quickly see that Friday’s bullish action put the index above its prior “swing high,” which was represented by the high of September 21. The prior high, around the 1,920 to 1,925 area, should now act as the new support level on any pullback in the index. As for resistance, the Nasdaq now has its 200-day MA at the 1,964 level, which it will likely test within the next few days. Because the 200-day MA is so powerful, it’s not likely the index will blast through its resistance without at least correcting a bit first. Therefore, consider selling into strength any long positions you have been holding during last week’s rally. You will probably be able to re-enter them at a better price because the Nasdaq made quite a large move last week without any significant correction. The daily chart of the Nasdaq below illustrates the break above the prior high from September 21, as well as the next major resistance of the 200-day MA (the purple line):

As you may recall, the S&P 500 Index ran into resistance of its weekly downtrend line about two weeks ago. However, the index is now poised to push through its downtrend line, which has been in effect since the high of March 2004. Any further gains in the coming week will cause the index to break the primary downtrend. The weekly chart illustrates how the S&P closed last week right at resistance of the weekly downtrend:

It goes without saying that last week’s market action was quite bullish, and the corresponding increase in overall volume confirmed the gains. The daily and weekly charts of the major indices are beginning to look quite bullish and we feel that a lot of caution should be exercised if you’re short. Odds in the intermediate-term favor the long side of the market, but don’t be surprised to see a small correction in the Nasdaq first because the index made quite a large run last week. At the least, a sideways correction by time for a day or two would be healthy for the market.

Today’s watch list:

There are no new plays for today, although we remain long SMH for swing.

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 = + $283

Open Positions:

selling into the opening gap at market

unrealized P/L = + $429

Notes:

We sold SWH when it hit our price target on Friday. We also plan to sell SMH into the pre-market gap today because SMH will gap up above its target.

Edited by Deron Wagner,
MTG Founder and
President