The Wagner Daily | December 17, 2004

Commentary:

Yesterday was a day of broad market divergence, as the Nasdaq Composite lost 0.8%, but the Dow Jones Industrial Average gained 0.1%. The S&P 500 Index lost 0.2%. The Nasdaq spent the first half of the day in a sideways holding pattern, but began to see selling pressure in the early afternoon. By 2:30 pm, the index had broken below support of the prior two days’ lows. The Nasdaq found mild support and bounced into the close, but still finished the day in the bottom third of its intraday range. Both the S&P and Dow followed a similar intraday pattern as the Nasdaq, but both indices showed relative strength because they fell to a much lesser degree than the Nasdaq.

Total market volume in the Nasdaq increased marginally yesterday, which technically made it a “distribution day.” Within the past four weeks, there have been a total of four “distribution days” in the Nasdaq. Volume in the NYSE came in 6% higher than the previous day. Since the S&P 500 lost 0.2% and on higher volume, we could say the NYSE also had a “distribution day,” but the Dow diverged and closed slightly higher. Despite the mild percentage loss in the S&P, breadth was firmly negative, as declining issues outnumbered advancing ones by nearly 2 to 1.

The main reason for the relative strength in the Dow yesterday was the strong performance of Johnson & Johnson (JNJ), and the entire Pharmaceutical Index in general. Over the past several days, we’ve been talking about the recent institutional sector rotation into the Pharmaceutical Index ($DRG), and that divergence became even more apparent yesterday. Though the Nasdaq lost 0.8% and the S&P dropped 0.2%, the $DRG index actually gained an impressive 2.4%! The fourth consecutive day of gains in that index also pushed our long position in PPH (Pharmaceutical HOLDR), which we bought on December 9, to an unrealized gain of more nearly 3.5 points. On a purely technical level, the big reason for the sudden strength in the formerly lagging drug sector is its breakout above resistance of its primary downtrend line that was intact for nearly a year. The weekly chart below illustrates this:

Prior resistance becomes the new support level once the resistance is broken, so expect the Pharmaceuticals to find support on any pullback to its former downtrend line. If you missed the first breakout in the index, consider waiting for a pullback to near the trendline OR a sideways consolidation of a week or two.

Remember that institutions are always moving their money from one industry sector to another. If you can quickly identify which sectors are seeing the institutional outflows and inflows, you can increase your odds of profitability by simply riding along their coat tails. When the broad-based indices become indecisive or stuck in a range, individual sector ETFs provide a much higher likelihood of success. We’re currently not seeing a lot of direction in the broad-based ETFs such as SPY, but PPH provides a better trending alternative. On the downside, consider shorting HHH (Internet HOLDR), which sold off sharply yesterday and may be forming a double top on its daily chart. OIH (Oil Services HOLDR) also appears to be forming the right shoulder of a bearish “head and shoulders” chart pattern.

Today is quadruple witching options expiration day, which means you should expect additional volatility and erratic behavior in many stocks, particularly during the latter half of today’s session. As such, use caution entering any new positions today and instead consider waiting until Monday.

Today’s watch list:

Since we currently have three open positions, there are no new trade setups for today. We remain long 1/2 position of PPH, full position of BBH, and short 1/2 position 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 = + $145

Open Positions:

unrealized P/L = + $158

BBH long (from Dec. 9) –
bought 146.60, stop 141.70, target 160.20, unrealized points = (0.75), unrealized P/L = ($75)

QQQQ short (HALF position, from Dec. 7) –
shorted 40.09, new stop 40.35, target 37.80, unrealized points = + 0.14, unrealized P/L = + $28

Notes:

Per intraday e-mail alert, we sold HALF of PPH into strength yesterday, but remain long the second half of the position with a tighter stop. Also note the new stop on QQQQ. No changes to BBH position yet.

Edited by Deron Wagner,
MTG Founder and
President