The Wagner Daily | December 20, 2004

Commentary:

The broad market registered its second consecutive “distribution day” last
Friday, as the major indices each closed lower AND on higher volume. A sudden
announcement of newfound danger in its key drug Celebrex caused Pfizer (PFE),
and several other large cap pharmaceutical companies, to sell off heavily,
dragging the Dow and S&P down as well. The S&P 500 Index lost 0.7% on
Friday, while both the Nasdaq Composite and Dow Jones Industrial Average closed
0.5% lower. Although the charts of PPH (Pharmaceutical HOLDR) looked quite
bullish going into Friday, the unexpected news from Pfizer, a heavily weighted
component, caused PPH to hit our trailing stop. However, due to our trailing
stop strategy, we still netted a small profit on the second half of the
position. Fortunately, we also locked in more than a 3-point gain on half the
position on the previous day. Interestingly, many of the pharmaceuticals
recovered quite a bit into the close and, because PPH above its breakout point
just over 71, we may re-enter the position if the market blows off the Pfizer
news this week.

Total market volume in the NYSE surged 38% higher than the previous day’s
level last Friday, while volume in the Nasdaq increased by only 4%. Obviously, a
significant part of the NYSE volume increase was attributed to the 850% volume
increase in Pfizer, which traded a whopping 291 million shares on Friday.
“Quadruple witching” options expiration day was also responsible for part of the
large volume increase. Regardless, it still marked the second straight day of
losses on higher volume in both the NYSE and Nasdaq. As long-time subscribers to
this letter already know, caution on the long side is definitely warranted when
the broad market begins to register consecutive days of institutional
distribution, especially when it occurs after an extended uptrend. One or two
more “distribution days” within the next week would probably be enough to
trigger a significant move lower in the broad market.

Going into last week, we were focused on the 2,152 resistance level on the
Nasdaq Composite, which represented the prior high from January of 2004. On both
Tuesday and Wednesday of last week, the Nasdaq managed to close above the prior
high of 2,152, and briefly registered new 52-week closing highs. However, the
index once again failed to close the week above that pivotal 2,152 level and
remains in danger of forming a very big double top from its January high. The
weekly chart below illustrates this:

As you can see, the Nasdaq has tried to close above its January high for the
past three weeks, but has failed each time. If you’re heavily long the Nasdaq,
this should be considered a serious warning to the bulls. While it’s not unusual
for an index to initially stall when testing resistance of a prior high, the
Nasdaq has stalled for three consecutive weeks. If the index fails to close
above 2,152 in the coming week, odds are good it will drop significantly in the
short-term. A correction down to support of its 50-day moving average, currently
at 2,041, would not be unrealistic. Although not illustrated in the weekly chart
above, the daily chart of the Nasdaq is showing short-term support at 2,123
(20-day MA), and then below around 2,100 (prior “swing low”). Short-term
resistance is obviously the 2,152 area, and then last week’s high of 2,171.

QQQQ, which is the ETF that tracks the Nasdaq 100 Index, has begun showing
relative weakness to the broader-based Nasdaq Composite Index. For the first
time since October, QQQQ closed below support of its 20-day moving average,
which also corresponded to a break of its steepest trendline support on its
daily chart. Take a look:

The prior trendline support you see on the chart above, as well as the 20-day
MA, should now act as the new resistance level on QQQQ.

Both the S&P 500 and Dow Jones Industrial Average are technically looking
stronger than the Nasdaq. But remember that the Dow, like the Nasdaq, has yet to
close a week above its high from the beginning of the year. The S&P 500
remains the only one of the three major indices that closed last week at a new
52-week high. If you look at daily charts of both the S&P and Dow, you will
notice that support of their 20-day moving averages is just below their closing
prices from last Friday. Support of their primary uptrend lines, which began
with the lows of October, also converges with their 20-day moving averages.
Therefore, watch the 1,187 area on the S&P and 10,554 area on the Dow as key
support levels. If both indices close the coming week below those levels, it
will set up the market for a broad-based correction. Upside resistance on both
of those indices is simply last week’s highs.

The week before Christmas is traditionally a bullish one, so be aware of that
fact. But be alert to the fact that anything can happen in the markets, and when
you least expect it. Friday’s unexpected drop in the Pharmaceutical Index was a
good example of this. The stock markets are closed the full day this Friday,
Christmas Eve, so expect volume to begin tapering off around mid-week. As
always, remember to trade what you see, not what you think!

Today’s watch list:

There are no
new setups for today, although we remain long a 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 = + $21

Open Positions:

unrealized P/L = + $128

QQQQ short
(HALF position, from Dec. 7) –
shorted 40.09, new stop 40.10, target 37.80,
unrealized points = + 0.62, unrealized P/L = + $124

Notes:

We were filled on PPH fifty cents below our stop price due to the fast
slide on the open. It was a judgement call whether or not to use the gap rules
on PPH, as the opening print was technically above our stop. Note the new stops
on both QQQQ and BBH.

Edited by Deron Wagner,
MTG Founder and
President