The Wagner Daily | December 10, 2004

Commentary:

After beginning the day on a negative note, the major indices found support at mid-day and spent the remainder of the afternoon in an uptrend. The reversal was impressive, as the Nasdaq Composite reversed from a 1.3% loss to close 0.1% higher. Both the S&P 500 and Dow Jones Industrial Average traded in a similar pattern and closed 0.5% and 0.6% higher respectively. Total market volume in the NYSE increased by 6%, which is bullish, but volume in the Nasdaq actually declined by 4%. As anticipated, the Biotech Index ($BTK) maintained its newfound relative strength and gained another 1.2% yesterday. This caused our long setup in BBH (Biotech HOLDR) to hit its trigger price, so we are now positioned in it with a small unrealized gain. The Pharmaceutical Index ($DRG) also continued to build on the previous day’s reversal. Although QQQQ reversed yesterday afternoon, we covered half of our short position, for a profit, near the intraday lows. This scaled exit strategy guarantees an overall profit on the trade even if the second half of the QQQQ short position stops out at breakeven.

Over the past week, we have been seeing divergence between the S&P/Dow and the Nasdaq. Specifically, the gains in both the S&P 500 and Dow Jones Industrials during the past two days completely erased the losses that each index sustained on the big “distribution day” that occurred on December 7. However, due to major weakness in the Semiconductors, the Nasdaq has only recovered half of its loss during that same period. Also, when comparing total market volume on the way down versus the recovery back up, you will notice that yesterday’s volume in the NYSE was higher than it was on the December 7 “distribution day.” In the Nasdaq, however, volume has declined during the past two days, despite price gains in the index. Yesterday’s volume in the Nasdaq came in 13% lighter than the monster volume of the December 7 “distribution day.” So, we have the S&P and Dow fully recovering their losses and on higher volume, but the Nasdaq has only recovered half its recent losses and on lighter volume. When the major indices begin to show divergence such as this, the broad market often becomes choppy and displays erratic intraday price action that is a result of the indices being out of sync with each other.

Looking at the shorter-term hourly chart of the S&P, you will see that SPY (S&P 500) has recovered the losses from earlier this week. However, you will also notice that the index closed right at resistance of its hourly downtrend line, which is the descending red line on the chart below:

Keep a close eye on this resistance level going into today because the S&P is likely to have a difficult time getting through it, especially considering the relative weakness in the Nasdaq. If you draw Fibonacci retracement lines, you will notice that the Nasdaq has only recovered 50% of its loss from Monday’s selloff:

Like we mentioned yesterday, your best risk/reward now is probably found by trading the individual sector ETFs instead of the broad-based ones. While SPY, DIA, and QQQQ are great for trending markets, the recent divergence between the indices may make it difficult to stay positioned on either side of the market. Conversely, individual sector ETFs like BBH (Biotech) or PPH (Pharmaceutical) are likely to continue trending even if the major indices enter into a trading range. As always, just keep those stops in place and remember to Trade what you see, not what you think!

Today’s watch list:

There are no new plays for today, although we are currently long BBH and short HALF position of QQQQ.

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 = + $150

Open Positions:

unrealized P/L = + $30

QQQQ short (HALF position, from Dec. 7) –
shorted 40.09, new stop 40.29, target 37.80, unrealized points = + 0.04, unrealized P/L = + $8

Notes:

No changes to the QQQQ stop yet.

Edited by Deron Wagner,
MTG Founder and
President