The Wagner Daily | December 27, 2004

Commentary:

The broad market wrapped up the holiday-shortened week on slightly positive note, but a big drop in volume prevented the major indices from gaining any momentum. Buyers pushed the indices higher during the first ninety minutes of trading last Thursday, but stocks drifted modestly lower throughout the remainder of the day. The Nasdaq showed relative strength this time and closed 0.2% higher. The Dow Jones Industrial Average similarly gained 0.1%, but the S&P 500 was unchanged. As expected, total market volume dropped off significantly. Volume in the NYSE declined by 31%, while volume in the Nasdaq was 21% lighter than the previous day.

Although the broad market was relatively lethargic last Thursday, the Biotech sector showed a lot of strength, which pushed our long position in BBH (Biotech HOLDR) to a 5-point unrealized gain. The weekly chart of BBH below shows how the index broke out above a big area of resistance around the 150 level last week:

Looking at the longer-term weekly charts of the broad market, you will notice that each of the major indices closed at new multi-year highs last week. Until recently, it appeared that the broad market was going to close 2004 flat to lower overall. But now, the major indices are likely to close the year in the green. While the weekly charts are firmly bullish, the daily charts of the the broad-based ETFs are once again beginning to appear a bit “heavy,” especially considering that their recent gains occurred on much lighter than average volume. This is especially true of QQQQ (Nasdaq 100 Index), which remained stuck below its 20-day moving average throughout all of last week.

On December 17, QQQQ gapped down and closed below support of its 20-day moving average for the first time in seven weeks. Basic technical analysis dictates that a prior support level becomes the new resistance level once the support is broken, which is exactly what has happened in this instance. Since December 17, the 20-day MA has perfectly acted as overhead resistance on QQQQ during the past five sessions. The daily chart below illustrates how the prior support of the 20-day MA has clearly been acting as resistance:

While it has probed above the 20-day MA on an intraday basis, notice how QQQQ has failed to close above it during the past week. MTG remains short a half position of QQQQ, which was initially entered on December 7, and the stop has been lowered to just above resistance of that 20-day MA. Obviously, this remains the short-term area of resistance to watch as we enter the new week. But, if QQQQ can close back above 40, it could quickly and easily recover to set a new high, so don’t be too aggressive on the short side. Near-term support is the December 20 low of 39.09.

The daily chart of SPY (S&P 500 Index) ran into resistance of its prior week’s high, near the 121.10 area. There is not much overhead supply, so SPY could easily push through that level to a new high, but it remains a near-term area of resistance to be aware of. Take a look:

The stock markets are open every day this week, but we expect overall volume and institutional participation to remain lighter than average. As such, this will make it difficult to determine the validity of any trends that may develop. When the institutional money returns after the new year, its participation will quickly determine the short-term direction of the markets. But, in the interim, we continue to recommend you take a more cautious stance on both sides of the market. In particular, be sure your stops are in place to protect any sudden reversal of trends that may develop, which can easily occur on light volume days.

Today’s watch list:

There are no new setups for today, but we remain long 1/2 position of BBH, short 1/2 position of QQQQ, and short HHH, each with an unrealized gain.

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 = + $153

Open Positions:

unrealized P/L = + $226

QQQQ short (HALF position, from Dec. 7) –
shorted 40.09, new stop 10 cents above the high of first 20 minutes, target 37.80, unrealized points = + 0.33, unrealized P/L = + $66

HHH short (from Dec. 20) –
shorted 69.65, stop 70.75, target 65.75, unrealized points = + 0.52, unrealized P/L = + $52

Notes:

Per intraday e-mail alert, we sold half of BBH to lock in gains last Thursday, but remain long the remaining half position with a trailing stop at 149.30 now. Since QQQQ is gapping up to near our stop, we are using the MTG Opening Gap Rules to manage the position.

Edited by Deron Wagner,
MTG Founder and
President