The Wagner Daily | December 7, 2004

Commentary:

The broad market traded in a narrow range and closed near unchanged levels for the third consecutive day. Results were mixed, as the S&P closed 0.1% lower, but the Dow Jones Industrial Average showed relative weakness and lost 0.4%. The Nasdaq maintained its recent pattern of leadership and managed a gain of 0.2%. As we often see when the major indices settle in a tight trading range for several days, total market volume declined across the board. Volume in the NYSE came in 13% below the previous day’s level, while volume in the Nasdaq dropped 11%. Nevertheless, total volume in the Nasdaq has come in above its 50-day average for the past six consecutive sessions. Turnover in the NYSE, however, dropped below its average level yesterday.

For the past two sessions, the S&P 500 has formed “doji star” candlesticks on its daily chart. This formation occurs when an index trades in the positive and the negative on an intraday basis, but the closing price is roughly the same as the opening price. A “doji star” indicates indecision and often signals a trend reversal is near if the pattern occurs immediately following an extended rally or selloff. This candlestick pattern does not always lead to a trend reversal, but it does always indicate indecision in the market. We have circled the two “doji star” candlestick patterns on the daily chart of SPY (S&P 500 Index) below:

Despite the indecision in the S&P over the past several days, notice that the index is holding above its prior highs from the breakout that occurred on December 1. This is represented by the blue horizontal line on the chart above. As long as SPY holds above that horizontal line, which is around the 118.80 area, we would be positioned mostly on the long side of the broad market. Although there has been indecision of late, don’t forget the S&P 500 remains at a multi-year high. Like water flowing down a mountainside, markets will always follow the path of least resistance. When an index is at a new 52-week high, it doesn’t take much buying interest to spark another rally because the sellers are gone. In other words, there is simply a lack of overhead supply. However, all bullish bets are off in the short-term if the S&P 500 (and SPY) close below their December 1 lows within the next few days.

While the S&P remains at fresh highs, the Nasdaq Composite continues to struggle with registering a closing price above its prior 52-week high of 2,152, which was set in January 2004. The index has traded above that key resistance level on an intraday basis during the past three days, but has failed to actually close above it. The weekly chart of the Nasdaq below illustrates this:

Keep a close eye on that pivotal 2,152 level illustrated above because the Nasdaq needs to soon set a new 52-week high as well in order for the S&P to maintain its strength. Otherwise, we will be looking at a double top in the Nasdaq. The Nasdaq has not given us any reason to be short at current price levels, but we do recommend tight stops on any long positions, just in case the index is unable to breakout from here. Remember that the Semiconductor Index usually leads the Nasdaq, so keep a close eye on the $SOX over the next several days for potential clues as to the Nasdaq’s short-term direction.

It has been our general sense over the past several days that the broad market keeps attempting to go higher, but lacks the momentum and buying interest necessary in order to sustain a move. Conversely, however, institutions don’t seem interested in selling either. This combination of factors has created an overall lack of direction and indecision in the major indices. If forced to choose a side, we would say odds favor the long side of the market in the short-term, simply due to the lack of overhead supply at current levels. But it seems like a much better idea to be positioned mostly in cash right now until the Nasdaq confirms it is capable of closing at a new 52-week high. When the broad market is at key, pivotal points, capital preservation must always be your first priority.

Today’s watch list:

SMH – Semiconductor HOLDR
Long

Trigger = above 34.85 (above yesterday’s high and 200-day MA)
Target = 37.70 (61.8% Fibo retracement of the 2004 selloff)
Stop = 33.70 (below yesterday’s low)

Notes = We have been stalking SMH for a re-entry and like the fact that the $SOX index has now closed above its 200-day MA for the past several days. We believe this should become a new base of support that will set up the sector for further upside, taking SMH along with it.

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 = + $63

Notes:

No changes to the PPH stop.

Edited by Deron Wagner,
MTG Founder and
President