The Wagner Daily | October 26, 2004

Commentary:

Taking a cue from last Friday’s selloff, the major indices began yesterday morning on a weak note, but a mild wave of buying at mid-day reduced the losses to near the flat line. This caused the S&P 500, the Nasdaq Composite, and the Dow Jones Industrials to each close with the same loss of 0.1%. In the broad market, it was a flat and boring day overall because the S&P futures traded within a narrow, five-point range throughout the day. The lack of volatility limited the opportunities for daytrading the broad-based indices, but several individual market sectors such as Utilities ($DJU) and Gold/Silver Mining ($XAU) turned in impressive gains. Total market volume in the NYSE declined by 6% yesterday, while volume in the Nasdaq came in 8% below the previous day’s level. A decline in volume is common on sideways, narrow range days.

Because the major indices each traded in a tight range and closed near their unchanged levels, not much changed from a technical basis yesterday. We still have the same divergence of the Dow Jones sitting at new lows of the year, the Nasdaq Composite toying with support of its primary uptrend line, and the S&P 500 in “no-man’s land.” However, since last Friday was a downtrending day, yesterday’s consolidation of the broad market near Friday’s lows could be interpreted as a bearish consolidation (aka “correction by time”). Just as a consolidation near the highs or a rally usually leads to new highs, a consolidation near the lows of a prior selloff usually results in new lows being set. However, given the divergence and mixed picture we’ve been pointing out to you over the past two weeks, we are more inclined to maintain a neutral bias in the short-term rather than a bearish one.

One thing we found interesting about yesterday’s session was that Crude Oil set an all-time high, Spot Gold tested a new 7-year high, and the U.S. dollar tested an all-time low against the Euro. The combination of these events would seem to be quite bearish in the macro picture of the equities markets, yet not one financial publication I read has talked about the combination of these events. Is it just my imagination or could the “smart money” be telling us something by having been jumping to “safety” during the past year. In this newsletter, we don’t talk much about these events because they don’t affect the short-term direction of the broad market very much, but it sure puts things in perspective when considering the longer-term outlook of where the equities markets may be headed. Just for fun, take a look at the value of the Euro relative to the U.S. dollar during the past two weeks:

As you can see, the Euro has closed higher against the Dollar for the past 9 consecutive trading sessions. A weak dollar is bad for many reasons, but a big one is that it causes foreign investors to withdraw their investments in the U.S. equities markets. This, of course, could have a profound, bearish effect on the stock market, as the Dow is already sitting at a new low of the year.

The Gold Mining Index ($GOX) closed at a new 7-year high yesterday, as the price of Spot Gold also tested its 7-year high near the $430 area. Long-time readers of The Wagner Daily should have already had long positions in the gold and silver mining stocks, as we have pointed out each of the significant pullbacks in this sector ever since it broke its weekly downtrend line. We continue to hold positions in a basket of gold and silver mining stocks, each of which did great yesterday. I personally bought more gold coins over the weekend, in anticipation of a pop to new highs in the price of Spot Gold yesterday. The weekly chart of the $GOX below illustrates the breakout to new multi-year highs:

Finally, as I am sure you know if you drive a car, the price of Crude Oil once again set a new high yesterday. Many people are saying the price of Crude can not go much higher, but it keeps doing so every week. Check out the amazing, parabolic run in Crude Oil contracts over the past year:

While we usually focus on technical support and resistance levels of the broad market and ETFs in the short-term, it often helps keep things in perspective when you have an idea of what the “big macro picture” looks like. We will soon take a look at some long-term monthly charts of the major indices as well, which you may find quite interesting. In the interim, continue to take it easy with your trading because the market remains indecisive and choppy. You’re not missing anything if you’re in cash now.

Today’s watch list:

There are no new plays for today, although we are now short RTH (Retail HOLDR), per yesterday’s intraday e-mail alert to subscribers.

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 = ($13)

Notes:

Per intraday e-mail alert, we shorted RTH yesterday when it broke a double bottom and traded below its 200-day MA. We anticipate further weakness in the Retail sector in the coming week.

Edited by Deron Wagner,
MTG Founder and
President