The Wagner Daily | October 19, 2004

Commentary:

As expected, the Nasdaq Composite bounced perfectly off support of its primary uptrend line yesterday, but its volume lagged behind. A broad-based rally in the tech-related sectors enabled the Nasdaq, which closed at its intraday high, to gain 1.3% yesterday. Both the S&P 500 and Dow Jones Industrial Average showed relative weakness and closed only 0.5% and 0.2% higher, respectively. While it was positive to see follow-through on Friday’s gains, volume in the Nasdaq was 8% lighter than the previous day. Total market volume in the NYSE declined by a substantial 16%. Lighter volume on an “up” day is, of course, the opposite of what you want to see in a healthy bull market.

In yesterday’s Wagner Daily, we discussed how the Nasdaq closed last week on support of its primary uptrend line, but the S&P 500 closed well below it. As such, we predicted choppy market conditions or, at the very least, divergence between the major indices. Yesterday’s 1.3% rally in the Nasdaq, but only 0.5% gain in the S&P and 0.2% gain in the Dow Jones, is a clear example of this divergence. As we enter today, the Nasdaq is poised to continue moving higher, but the S&P and Dow Jones both have an abundance of overhead supply from last week’s bearish action. This divergence is clear on the daily charts of both the Nasdaq Composite and the S&P 500 below. Look at the Nasdaq first:

On the Nasdaq chart above, you can see how the uptrend line clearly enabled the index to rally off its support yesterday. Resistance will be found at the October 13 high of 1,948. More significant resistance is the 200-day moving average (the purple line), which stopped the rally dead in its tracks two weeks ago. Although the bounce off the trendline support was bullish, we are a bit skeptical of being aggressively long due to the fact that yesterday’s rally occurred on declining volume. When you factor in that the Nasdaq also had two days of distribution last week, as marked by losses on higher volume, it makes us even more cautious about being long. Nevertheless, odds in the Nasdaq slightly favor the long side over the short side of the market. Just consider reducing your share size with new positions. Now, take a look at the S&P 500 daily chart:

Unlike the Nasdaq, the S&P 500 Index closed below its trendline support last week, and will now have to contend with its resistance. Remember that prior support levels become the new resistance levels once the support is broken. Further adding to the overhead resistance is the fact that the 200-day moving average has converged with resistance of the prior uptrend line. Obviously, it will take a lot of volume to the upside in order to power through this resistance level. But, support was found at last Friday’s low, which corresponded to a double bottom with September’s low.

IBM, among others, announced corporate earnings after the close yesterday and the after-hours market reaction was initially positive. If that momentum carries through into today’s open, we can expect an opening gap higher in both the S&P and Nasdaq futures. However, just as we don’t sell short large opening gap downs, we also don’t buy large opening gap ups UNLESS the index sets a new high after the first 20 minutes of trading. Following the MTG Opening Gap Rules is a great way to keep yourself out of trouble when the market is exhibiting lots of opening gaps.

Today’s watch list:

Due to the renewed interest in the tech sector, which has been brought on by institutional sector rotation, we are looking at buying SMH (semiconductor HOLDR) for a swing trade today. However, the overhead resistance and declining volume discussed above makes us a bit hesitant to call this as an “official” trade entry. Therefore, you may want to consider buying SMH today, but only if it holds its large gap. You should also use a tight stop just below the 20-minute low.

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 = ($270)

Notes:

There is no change to our stop on HHH, but remember to use the MTG Opening Gap Rules if the position gaps up and opens at or near our stop price. Basically, this means we will wait for a break to a new high after the first 20 minutes before covering the position. Otherwise, the new stop becomes the price 10 cents above the 20-minute high.

Edited by Deron Wagner,
MTG Founder and
President