The Wagner Daily | December 28, 2004

Commentary:

The broad market began yesterday on a positive note, but traders immediately sold into strength, causing the major indices to trend lower throughout the day. Like the previous day, the Nasdaq Composite again showed the most relative strength and closed only 0.3% lower. The S&P 500 Index lost 0.4%, while the Dow Jones Industrial Average shed 0.5%. Both the S&P and Dow closed at their intraday lows, but the Nasdaq did not. Total market volume remained well below average levels and was on par with last Thursday’s sleepy, pre-holiday session. Volume increased by 3% in the Nasdaq, but was lower by the same percentage in the NYSE.

In yesterday’s newsletter, we discussed how QQQQ (Nasdaq 100 Index) had been unable to close above resistance of its 20-day moving average during the previous five sessions. When the Nasdaq subsequently opened yesterday morning, QQQQ had gapped up above both last week’s high and its 20-day MA, but the bears promptly took control and drove it back below the resistance level. QQQQ once again finished the day below its 20-day MA and in the middle of last week’s range. Yesterday’s opening gap up and subsequent failure created additional overhead supply that will probably result in QQQQ dropping below last week’s low within the next several days. If this occurs, expect the 50-day moving average to become the next area of support, about one point lower than yesterday’s close. The daily chart of QQQQ below illustrates how QQQQ is poised to break below last week’s low and support of its primary uptrend line from the October low (the ascending blue line):

After selling off for several days in the week ending December 17, the S&P 500 Index found support and rallied off its primary uptrend line on December 21. However, yesterday’s loss caused the index to drop back down to its primary uptrend line only several days later. Therefore, due to the short duration since the last test of trendline support, there is a good chance the index will drop below its primary uptrend line in the coming days. If it does, we will be looking to short SPY (S&P 500 Index) in anticipation of a correction down to its 50-day moving average. The ascending blue line on the chart below illustrates the primary uptrend line, which has been in place since the low of October 25. The 50-day moving average, currently at 1,165, is the target if the S&P breaks below the uptrend line:

Looking at individual sector ETFs, one industry that caught our attention is Oil Services, which is represented by OIH (Oil Service HOLDR). The Oil Services Index ($OSX), which was the biggest percentage loser of all the sectors we follow, dropped 2.3% yesterday. The daily chart of the index is also showing the formation of a right shoulder of a bearish “head and shoulders” chart pattern.

As you can see on the chart above, a logical short entry in OIH would be a trigger price below the 20-day moving average of 83.46, which would also represent a break of last week’s low. If shorting a break of the 20-day MA, your protective stop should be not more than just above the high of the right shoulder, over the $87 area. An initial target would be the prior low of 78.90, which represents the right side of the neckline. A subsequent break below that neckline would probably cause OIH to drop to support of its 200-day moving average, which is currently at 74.60.

The stock markets are open every day this week, but we expect overall volume and institutional participation to remain lighter than average until the new year. 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:

(none)

Open Positions:

unrealized P/L = + $215

QQQQ short (HALF position, from Dec. 7) –
shorted 40.09, stop 39.95, target 37.80, unrealized points = + 0.50unrealized P/L = + $100

HHH short (from Dec. 20) –
shorted 69.65, stop 70.75, target 65.75, unrealized points = (0.48), unrealized P/L = ($48)

Notes:

No changes.

Edited by Deron Wagner,
MTG Founder and
President