The Wagner Daily | October 29, 2004

Commentary:

After two days of solid gains, it would have been perfectly normal for the broad market to take a step back yesterday, but it didn’t. Each of the three major indices held on to all of their gains from the prior two days, while both the S&P 500 and Nasdaq even managed to move a bit higher. Follow-through strength in the Semiconductor Index ($SOX) enabled the Nasdaq to move another 0.3% higher, which brought its three-day gain to 3.2%. The S&P 500 Index also tacked on another 0.2%, but the Dow Jones Industrial Average closed flat. As is common on consolidation days, volume in both the NYSE and Nasdaq declined from the previous day’s levels. Total market volume was 6% lighter in the NYSE and 14% lower in the Nasdaq. We normally want to see higher volume on the “up” days, but the combination of higher closing prices and lighter volume means that sellers were not rushing to sell into the strength of the prior two days. Rather, the big buyers simply took a break.

We normally analyze daily charts in order to look for specific ETF trade setups, but occasionally look at longer-term weekly charts in order to see the “big picture” of where the market is headed in the longer-term. Daily charts are effective, but they sometimes show a lot of “noise” that makes it difficult to interpret any real trends, especially in choppy market conditions. Conversely, weekly charts tend to remove much of the choppiness and indecisive nature that shorter-term charts tend to amplify. If you look at weekly charts of both the S&P 500 and Nasdaq Composite, you will notice that both indices are once again poised to break out above their weekly downtrend lines, which have been intact for many months. We’ll begin by taking a look at the S&P 500 Index. Note that we have removed the moving averages so you can more easily see the downtrend line we’re referencing:

As you can see, the downtrend line in the S&P 500 began with the high that was established in March of 2004. During the past seven months, the index has set three “lower lows” and two “lower highs” on its weekly chart, which meets the technical definition of a downtrend. Three weeks ago, in the middle of the week ending October 8, the S&P briefly popped its head above resistance of the downtrend line, but the prior downtrend resumed because the index later sold off and closed the week below the trend line again. However, since that time, the S&P has already rallied back up to test this trend line resistance again. More importantly, the retracement from three weeks ago was shallow, as the index actually formed a “higher low” by holding and reversing well above its August low. Therefore, we feel odds are good the S&P 500 will actually break and hold above its weekly downtrend line this time around. This would be confirmed if the index rallies above its prior high from three weeks ago, just above the 1,142 level. Because today is a Friday, any further gains in the S&P today would cause the index to close the current weekly bar above the downtrend line. But, just as the breakout failed three weeks ago, it could easily do it again today. The eyes of all technical analysts and traders will be on how the S&P acts today, near this pivotal level. Similarly, the Nasdaq Composite is also poised to break out and close above its weekly downtrend line. Take a look:

Like the S&P 500, the Nasdaq Composite is also at a pivotal “make or break” level that could propel the index much higher if it breaks out or send it back down to its prior lows if it fails. The heavily-weighted $SOX index is breaking out above resistance on its daily chart and is also testing resistance of its weekly downtrend line now. Whether or not the Nasdaq breaks out from here will be directly tied to the performance of the Semis, so keep a close eye on that sector. We anticipate the $SOX will pull the Nasdaq higher, which is why we bought SMH (Semiconductor HOLDR) yesterday. However, keep in mind the uncertainty of the November 2 Presidential election may cause some added volatility in the markets.

I’m personally headed off to Chicago to kick off the MTG Fall Seminar Series. I look forward to meeting those of you who have signed up to attend in one of the five upcoming cities. This coming Monday also marks the launch of our new swing trading newsletter, The MTG Stalk Sheet, which focuses on the best 1 to 3 trade setups in the stock market each day. All Wagner Daily subscribers will automatically receive a free trial to this additional new service, but the format of The Wagner Daily will not change a bit. Have a great weekend everyone!

Today’s watch list:

There are no new plays for today, but we are now long SMH (Semiconductor HOLDR), per yesterday’s entry.

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 = + $33

Notes:

Yesterday’s SMH buy setup triggered and looks great above its prior resistance now.

Edited by Deron Wagner,
MTG Founder and
President