The Wagner Daily | November 30, 2004

Commentary:

Yesterday’s broad market action was enough to give a trader whiplash, as both bulls and bears experienced quite a bit of intraday volatility with their positions. The major indices began yesterday with an opening gap up to or above Friday’s highs, but the gap quickly filled and triggered a sharp selloff into negative territory. But just as the bears began to feel good, buyers stepped in during the early afternoon session and pushed the broad market back up to its upper third of the intraday range. Another selloff during the final hour, however, caused the major indices to drift back down towards their lows of the day. While a small price retracement in the afternoon would have been a perfectly normal reaction to the morning selloff, the extent of the retracement was quite unusual, especially considering the broad market failed to close strong after such a sudden intraday reversal. Both the S&P 500 and Dow Jones Industrials showed the most relative weakness and closed 0.3% and 0.4% lower respectively. Strength in Apple Computer helped the Nasdaq close 0.2% higher, although it was trading with a 0.8% gain at its intraday highs.

Total market volume in the NYSE increased by 172%, while volume in the Nasdaq was 175% higher than the previous day. Though the increase may sound monstrous, remember that volume last Friday was nearly non-existent due to the holiday-shortened session. If you factor out Wednesday’s pre-holiday session and Friday’s shortened one, volume actually came in among its lowest levels of the past two weeks. Therefore, it’s difficult to determine if yesterday was truly a day of distribution. If the broad market experiences losses on higher volume over the next several days, however, it will confirm the weakness that began yesterday. As always, maintain a watchful eye on the relationship between how the market acts over the next several days as volume begins returning to the markets.

In yesterday’s newsletter, we pointed out the proximity of how close the S&P was to breaking support of its primary uptrend line, and yesterday’s selloff did indeed result in a break of that support level. Prior support becomes the new resistance after the support level is broken, so we expect that trendline to now act as an important area of resistance over the next several days. It’s still too early to declare the recent uptrend is finished, but I certainly would use a lot of caution on the long side of the market right now, more so in the S&P and Dow-type sectors than the Nasdaq. The daily chart below illustrates the break of trendline support in the S&P:

Though the S&P broke support of its uptrend line yesterday, the Nasdaq did not. Therefore, don’t get too aggressive with shorting the broad market yet. We feel some well placed shorts in sectors with relative weakness are a good idea, but consider keeping smaller than usual share size until we receive more confirmation of yesterday’s weakness. One sector that cracked yesterday was the Home Construction Index ($DJUSHB), and we expect follow-through to the downside in those stocks. There is not an ETF that tracks the index, but leading stocks in that sector to consider shorting are: LEN, DHI, TOL, KBH, BZH, HOV, and PHM. The Utility sector, which has been incredibly strong over the past year, also began showing signs of weakness yesterday. The ETF that tracks the index is UTH. As for sectors bucking the trend and showing relative strength now, consider the Pharmaceuticals, which is why we are stalking PPH for long entry.

Today’s watch list:

PPH – Pharmaceutical HOLDR
Long

Trigger = above 69.05 (above yesterday’s high)
Target = 72.90 (just below prior high of October)
Stop = 67.55 (below last week’s low)

Notes = This play did not trigger yesterday, but we still like it for long entry today if it breaks above yesterday’s high. The Pharmaceutical sector suddenly began showing relative strength on Friday, so we feel this sector may finally be poised to break its downtrend. PPH also has formed a double bottom from the low of November 2. Therefore, we’ll look to buy PPH on a break out above yesterday’s high.

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 = ($38)

SPY short (HALF position, from Nov. 23) –
shorted 117.87, covered 118.53, points = (0.66), net P/L = ($67)

Open Positions:

unrealized P/L = + $18

SPY short (HALF position, from Nov. 23) –
shorted 117.87, stop 119.05, target 116.10, unrealized points = + 0.06, unrealized P/L = + $6

Notes:

Per intraday e-mail alert, we covered HALF the position size of our SPY and DIA shorts when the market reversed in the afternoon. However, we remain short half position size of both ETFs. PPH traded up to our trigger price for entry, but not above it. So, we are not yet long PPH, but are stalking it again for potential entry today.

Edited by Deron Wagner,
MTG Founder and
President