The Wagner Daily | December 13, 2004

Commentary:

The broad market wrapped up last week with a lackluster session on Friday, as each of the major indices traded in a very narrow, sideways range and subsequently closed nearly unchanged. Friday’s session was a bit boring for both the bulls and bears, as the S&P 500 spent most of the day in less than a 5-point trading range. Despite being the last session of the week, traders saw little reason to take action going into the final hour, so the S&P 500, Nasdaq Composite, and Dow Jones Industrials each closed between flat and 0.1% lower. As we often see on narrow-range days, total market volume declined as well. Volume in the NYSE came in 11% lighter, while volume in the Nasdaq was 21% lower than the previous day’s level. For the week, each of the major indices registered minor losses, but on heavier volume.

In last Friday morning’s Wagner Daily, we showed you how the S&P 500 Index had closed right at resistance of its hourly downtrend line, which began with the high of December 3. Friday’s subsequent lack of action means the index remains near that same downtrend line. It also appears that the 1,192 level has become an area of horizontal, short-term price resistance that is worthy of keeping an eye on today. The red horizontal line on the daily chart below illustrates the resistance around the 1,192 level (which also corresponds with 119.55 on SPY):

The Nasdaq Composite has found a similar area of short-term, horizontal price resistance at the 2,135 level. However, the difference between the S&P and Nasdaq is that the S&P has recovered nearly all of its losses from December 7, but the Nasdaq has only made up half of its loss from that same day. Therefore, the Nasdaq technically has more overhead supply than both the S&P and Dow. As you know, this divergence has been attributed to the relative weakness of the Semiconductor Index ($SOX), which ran into resistance of both its 50 and 200-WEEK moving averages last week. The daily chart of the Nasdaq Composite below illustrates the resistance at the 2,135 level. Also note support of the 20-day moving average at last week’s low:

If the Nasdaq manages to rally and close above the 2,135 level, don’t forget that 2,152 is key resistance of its prior high from January 2004. The first test of the January high that occurred last week resulted in a brisk selloff on December 7.

Last week’s broad-based, but moderate, losses on higher volume should cause bulls to be cautious entering the new week. However, the fact that both the S&P and Dow recovered to close the week near their highs of their recent ranges is positive. Because the S&P is sitting within only a few points of its 52-week high, it won’t take a lot of buying interest to cause the index to break out to the upside once again. However, the relative weakness in the Nasdaq could prevent the S&P and Dow from gathering momentum. Therefore, we are playing it conservatively on BOTH sides of the broad market right now. Instead of the broad-based ETFs like SPY or QQQQ, we are continuing to focus on individual sector ETFs that are diverging from the broad market’s lack of direction. Specifically, we continue to like the Biotechs (BBH or IBB) and Pharmaceuticals (PPH) on the long side. Spot Gold may also be forming a bottom after last weeks’ correction on the weekly chart, so keep an eye on GLD as well. On the short side, consider the Internets (HHH), which may be forming a double top on the daily chart. As always, keep protective stops in place because narrow-range consolidations often explode in one direction or the other.

Today’s watch list:

HHH – Internet HOLDR
Short

Trigger = below 69.68 (below Friday’s low)
Target = 66.10 (support of the uptrend line from the August low)
Stop = 70.80 (above Friday’s high)

Notes = The Internet Index ($GIN) sold off sharply on December 7, recovered into Friday morning, but then sold off again into the close. This tells us the index may be forming a double top at its daily chart, so we are looking to short a rollover in the index via HHH. Note, however, the index is still firmly in a daily uptrend, so we can’t be too greedy with this one. We are simply looking for a selloff down to support of its primary uptrend line, around the $66 area.

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 = ($7)

QQQQ short (HALF position, from Dec. 7) –
shorted 40.09, stop 40.29, target 37.80, unrealized points = + 0.16, unrealized P/L = + $32

Notes:

Remember to use the MTG Opening Gap Rules to adjust the stop to above the 20-minute high if QQQQ gaps open above the stop price.

Edited by Deron Wagner,
MTG Founder and
President