Commentary:

Last week started on a positive note, but closed on a negative one, as the major indices all reversed and closed the week lower after hitting key resistance points. The broad market followed through on the previous day’s weakness, and the Nasdaq’s 1.5% loss on Friday was its largest loss of the past two weeks. Nevertheless, a 1.5% correction is not too bad considering the index has rallied more than 12% in less than two months. The Semiconductor Index ($SOX) broke below its bullish consolidation of the prior four days and shed 3.4%. This, of course, was a big drag on the Nasdaq. The $SOX, however, did hold above support of its uptrend line from the low of August. The selling was less severe in the S&P 500 and Dow Jones Industrial Average, which lost 0.8% and 0.7% respectively.

In our last newsletter, we discussed the importance of Friday’s session with regard to whether or not the S&P 500 would close above or below its primary downtrend line that has been in place since March of 2004. Since the index failed to rally on Friday, it once again put in a weekly close below its primary downtrend line. The weekly chart below illustrates how the S&P 500 probed above its downtrend line during the week, but ultimately closed below it:

In addition to the S&P closing below its downtrend line, the Nasdaq Composite failed to hold above its 200-day MA. Both of those levels are key resistance points to watch in the coming week. Speaking of resistance, the Gold/Silver Mining Index rallied up to our initial price target, which was resistance of its prior high from April 2004. If you are still long the gold and silver stocks, consider using a tight stop or selling into strength to lock in your gains. If you entered when we did on September 21, you are probably sitting with an average gain of about 10% in most of those stocks. The weekly chart below shows our entry point and exit point, as the index is now testing its prior high:

The most important observation of Friday’s session was that, despite broad-based losses, total volume in both the NYSE and Nasdaq came in lighter than the previous day. The Nasdaq’s 4% decline in volume was the second consecutive day of losses on lighter volume, which followed six straight days of gains on higher volume. Volume in the NYSE declined by 10% and was the lightest volume day of the past nine. Remember that a healthy market always rallies on higher volume, while it corrects (retraces) on lighter volume, which is exactly the pattern we have been seeing for more than two weeks.

The major indices corrected at the end of last week, but we caution you against entering new short positions here. Because the major indices spent the first half of last week rallying on higher volume, then declined for two days on lighter volume, we view the recent losses as a healthy correction and not a major change in bias. If, however, we begin to see a drop in volume on the “up” days or an increase in volume on the “down” days, our analysis may change. But, until that occurs, we remain bullish and view it as a wise decision to buy pullbacks in the broad market. Don’t forget that volume never lies and we always trade what we see, not what we think!

---

Today’s watch list:

There are no new plays for today.

---

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:

SMH long (from Oct. 5) –
bought 31.78, sold 31.13, points = (0,65), net P/L = ($202)

Open Positions:

(none)

Notes:

SMH stopped out on Friday. QQQ never exceeded more than 6 cents above its high of first 20 minutes, so it did not trigger (almost did).

Edited by Deron Wagner,
MTG Founder and
President