The Wagner Daily | November 9, 2004

Commentary:

The S&P 500 and Nasdaq Composite indices both snapped their impressive winning streaks yesterday, but only fractionally, as the broad market paused to absorb last week’s gains. After opening near unchanged levels, the major indices traded perfectly sideways yesterday in a very narrow intraday range. Both the Nasdaq and the Dow Jones Industrials closed unchanged, while the S&P 500 retreated an inconsequential 0.1%. Total market volume in the NYSE was 21% lighter than the previous day, while volume in the Nasdaq came in 15% lighter. Remember that declining volume on a consolidation day that followed a rally is exactly what you want to see because it indicates institutions were not selling into strength. Rather, institutions simply took a break from their buying programs. If you look at the price to volume relationship of the past several weeks, you will notice that most of the “up” days occurred on higher volume, while the (very few) “down” days occurred on lighter volume than the previous day. This means that volume has been confirming the market’s overly bullish price action, which is always necessary in order for us to retain long positions.

The S&P 500 Index printed at a new 52-week closing high last Friday, but the current level needs to hold in order to prevent a double top from forming at the index’s prior highs from the beginning of the year. The blue horizontal line on the weekly chart of the S&P below illustrates the importance of the support level just below the index’s current price:

While not near a 52-week high, the Nasdaq Composite Index is approaching key resistance of its prior highs from both April/May, as well as July of 2004. If the Nasdaq rallies above this level, it will represent a new uptrend based on a “higher low” and “higher high” being formed. But, failure to break above the July high would mean the index, while no longer in a downtrend, is not yet in an uptrend either. Obviously, much of this will come down to the performance of the $SOX (Semiconductor Index). The red horizontal line on the weekly chart of the Nasdaq below illustrates the resistance from its prior highs:

Because the major indices closed at or near unchanged levels, yesterday’s market action was essentially a non-event. Therefore, we have the same short-term thoughts going into today as stated in yesterday’s newsletter. To summarize, continue to keep a close eye on the Semiconductor Index, as it held up well yesterday and is closing in on resistance of that weekly downtrend line. A rally in the $SOX above the November 3 high of 424.25 is necessary in order to confirm the break above the weekly downtrend line. Remember that a breakout in the $SOX is necessary in order to confirm the recent gains of the Nasdaq, so don’t ignore the importance of that under-appreciated broad market indicator.

The broad market ETFs have only had one day of correction so far, which really did not even count. So, before jumping into new positions in SPY, QQQ, or DIA, consider waiting for either a price retracement or at least another few days of sideways consolidation. Strong markets do not always retrace in price, but usually will at least trade sideways and consolidate, which allows the hourly moving averages to rise up and provide support to the price. Short setups are few and far between, but there are also very few long setups that provide a low-risk entry point as well. So, don’t force the trade setups to happen. Remember MTG’s mantra. . . Trade what you see, not what you think!

Be aware that the Feds are meeting tomorrow to discuss monetary policy and are largely expected to announce another interest rate hike. As usual, we expect volume to drop off ahead of the FOMC meeting, which means the market’s volatility may be kept in check for the next day and a half. This, of course, would be a good thing because it would also serve the dual purpose of enabling the broad market to correct by time.

Today’s watch list:

PPH – Pharmaceutical HOLDR
Long

Trigger = above 70.20
(above yesterday’s close and the hourly downtrend line)
Target = 72.90 (resistance of the prior high from October)

Stop = 69.20 (below yesterday’s low)

Notes = We may have been a few days early with this setup, but it still has not traded through its trigger price, so no harm done. We like the way PPH reversed and closed positive yesterday, so we continue to stalk this ETF for long entry, in anticipation of sector rotation. Note we are not bullish on this index because it is in a downtrend, but are simply looking to play a bounce on the long side. Remember to follow the price of $IPH, which is the index that tracks PPH. It will give you a more accurate idea of the fair value of PPH.

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 = ($54)

Notes:

SMH hit its trigger price yesterday. Note the adjusted stop price.

Edited by Deron Wagner,
MTG Founder and
President