The Wagner Daily | October 14, 2004

Commentary:

Sparked by enthusiasm from Intel and Yahoo!’s earnings reports, the broad market began yesterday with a steep opening gap, but promptly sold off and drifted lower throughout the day. The Nasdaq Composite opened 1.2% higher, but closed the day 0.2% lower. Both the S&P 500 and Dow Jones Industrial Average also gapped up significantly, but both indices closed with a 0.7% loss. Interestingly, yesterday’s market action was exactly the opposite of the previous day. On Tuesday, the major indices began the day with a large opening gap down, but exhibited bullish action by slowly crawling higher throughout the day. Needless to say, the fact that yesterday’s gap failed to remain intact is equally bearish. The Basic Material and Energy sectors, both of which have been leading the market’s rally of the past several months, sold off sharply yesterday. When the leading sectors begin to show weakness, it is often a sign that an intermediate-term rally may be nearing exhaustion.

More importantly, volume in both the NYSE and Nasdaq came in 16% higher than the previous day. This means yesterday was a confirmed “distribution day,” representative of institutional selling. The previous day was technically a “distribution day” as well, but the intraday pattern of the broad market was not bearish. This means we have now seen two consecutive days of institutional selling, one which was on much higher than average volume. We have discussed during the past several weeks that our overall market bias would remain bullish as long as the price to volume relationship showed higher volume on the up days and lighter volume on the down days. But this has not been the case during the past week. We therefore are shifting to an overall neutral bias in the broad market, meaning that cash is probably the best scenario until the market shows the direction of its next major move.

In yesterday’s Wagner Daily, we told subscribers we would maintain a bullish bias in the broad market as long as the S&P 500 held above support of its primary uptrend line. But, yesterday’s selloff caused the index to close below both its 200-day MA and support of its primary uptrend line. A one day break of a trend line does not represent a confirmed break because they can often bounce back the next day. Nevertheless, it warrants a great degree of caution with all long positions because any further weakness today is likely to result in another wave of selling due to stops being hit. Yesterday’s “distribution day” adds further confirmation of the possible change to a more negative bias:

As most of you know, we made a large profit from a basket of gold and silver mining stocks that we bought when the index broke out last month. We held those positions until the Gold and Silver Index ($XAU) rallied into resistance of its prior high from April 2004, at which point we took profits. Since then, we have been waiting for a normal price correction in the index so that we can re-enter the gold and silver stocks in anticipation of catching the next move higher in the resumption of the uptrend. Yesterday, we received that opportunity, as the $XAU gapped down to support of its primary uptrend line. Take a look:

In the MTG Real-Time Room, we told subscribers we were buying positions in PDG, along with a few other stocks in the sector. The index subsequently rallied into the close, leaving us with a small unrealized gain on our first day of the re-entry. We tell you this because you may want to consider taking positions in this sector today, placing your stops below yesterday’s lows. The usual suspects in the sector are: NEM, ABX, GFI, GG, PDG, PAAS, CDE. The Morpheus hedge fund has positions in GG, PDG, CDE, and RANGY.

Today’s watch list:

There are no new ETF plays for today, but see note above regarding the gold/silver stocks, of which there is no ETF.

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 = ($256)

Notes:

HHH gapped open well above our stop yesterday, but we used the MTG Opening Gap Rules to manage the position. Since HHH gapped up, but sold off immediately afterwards, it never traded higher than its high of the first 20 minutes. This enabled us to stay with the short position, which dropped more than a point from its opening high. We have adjusted the stop as per above.

Edited by Deron Wagner,
MTG Founder and
President