The Wagner Daily | November 22, 2004

Commentary:

The broad market closed last Friday on a negative note, causing the Nasdaq Composite to snap its impressive four-week winning streak. The major indices each gapped down on the open, failed to recover, then trended lower throughout the entire day. The S&P 500 and Dow Jones Industrial Average each lost 1.1%, while the Nasdaq Composite shed 1.6%. Each of those three broad-based indices closed at their intraday lows, as well as their lowest levels of the week. The Oil Service Index ($OSX) again traded inversely to the broad market’s weakness and gained another 1.8%. As such, we took profits in our long position of OIH (Oil Service HOLDR), which exceeded its original 3-point profit target on Friday.

Total market volume increased by 5% in the NYSE last Friday, while volume in the Nasdaq came in 3% higher than the previous day. Because each of the major indices closed lower AND on higher volume, last Friday was a confirmed “distribution day.” Institutional selling is always bearish in the short-term, but a minimal number of “distribution days” can actually be healthy for a bullish market in an intermediate-term uptrend. Friday was the first clear day of institutional selling in more than a month, but keep an eye out for a potential string of “distribution days” within a two-week period. Such an occurrence would give us real reason to be concerned about the health of the broad market’s recent rally.

IWM, which is the ETF that tracks the Russell 2000 Small Cap Index, lost 1.1% on Friday. Because IWM has rallied so parabolically in recent weeks, there is not much price support just below its current level. As such, we remain short IWM with an unrealized gain of nearly a point, but are looking for a further correction down to support of its 20-day moving average. The daily chart of IWM below illustrates the next area of support at the 20-day MA:

Although it closed Friday at its worst level of the week, the S&P 500 Index now has support of its prior highs just below its current price. Prior resistance becomes the new support once the resistance is broken, so it’s likely the index will find a base between the 1,162 to 1,169 range in the coming week. The blue horizontal line on the chart below illustrates support of its prior highs:

Given the current area of support on the S&P, we would not recommend shorting SPY right here because the risk/reward is not very positive. Conversely, IWM is probably a better risk given the lack of a prior base. You may also consider shorting QQQ (Nasdaq 100 Index), but only with a small profit target of about 70 cents from Friday’s close. Such a small profit target would also require a correspondingly tighter stop.

Each of the major indices are now below moving average support on their hourly charts, but are well above moving average support on their longer term daily and weekly charts. When this occurs, we often see a short-term correction that lasts only a few days, but buyers typically return as soon as the indices begin to near support of their daily moving averages. Specifically, watch the 20-day moving averages as an area to take profits on any short positions and/or enter new long positions. We are slightly bearish on the short-term of the broad market, but the charts give us reason to maintain a bullish bias in the intermediate-term.

Today’s watch list:

UTH – Utilities HOLDR
Short

Trigger = below 94.79 (below Friday’s close)
Target = 92.40 (support of its 61.8% Fibo retracement from the Nov. 2 low to Nov. 12 high)

Stop = 95.79 (above Friday’s high)

Notes = The Utilities sector, which has had a fantastic run for the past six months, is beginning to show signs of relative weakness. As such, we are anticipating a short-term correction in that sector and are looking to take advantage of shorting a short-term retracement.

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:

net P/L = + $282

PPH long (from Nov. 15) –
bought 69.75, sold 68.87, points = (0.88), net P/L = ($90)

Open Positions:

unrealized P/L = + $75

Notes:

We sold OIH on Friday because it reached its profit target. PPH lost support and stopped out. IWM moved 1.5 points in our favor and we remain short with a new stop and target.

Edited by Deron Wagner,
MTG Founder and
President