The Wagner Daily | January 3, 2005

Commentary:

The broad market wrapped up 2004 on a quiet note and demonstrated the same lethargic action as the prior two days. The major indices put in a minor rally attempt early last Friday afternoon, but drifted back down during the final hour of trading. Both the S&P 500 and Nasdaq Composite closed 0.1% lower, while the Dow Jones Industrial Average lost 0.2%. Total market volume declined by another 5% in the NYSE, and was 3% lighter than the previous day’s Nasdaq volume. Even though the stock markets were open for a full day of trading, the volume levels were on par with the typical volume level of a holiday-shortened trading day. As such, Friday’s session was pretty much a non-event from a technical basis. For the week, the S&P 500 gained 0.1%, the Nasdaq gained 0.7%, but the Dow Jones lost 0.4%.

The year 2003 was a strong one for most stocks, but the major indices spent most of 2004 (from February through October) in a downtrend. Strength during the last two months of the year enabled the S&P, Nasdaq, and Dow to each break out above their primary downtrend lines and close the year on a positive note. For the year, the S&P 500 and Nasdaq gained 9.0% and 8.6% respectively, but the Dow only closed 3.1% higher. What does 2005 have in store? Obviously, nobody knows for certain, but a look at the long-term charts of the major indices may yield a few clues. Rather than attempting to predict what will happen, let’s look at the charts and see what they are telling us.

Since we are analyzing long-term price action, we will focus only on the monthly time frame of our charts and look back at the past five years, rather than using the shorter-term daily chart interval. We’ll begin by taking a look at the broadest-based of the major indices, which is the S&P 500 Index:

As you can see, the S&P trended steadily lower from mid-2000 through the beginning of 2003, which was not surprising given the huge bull run that occurred in the late 1990s. The year 2003 saw the S&P in a steady uptrend, while the index spent most of 2004 trading in a sideways range, until it rallied during the last two months. When analyzing such long time frames, one of the most useful tools at determining support and resistance levels is Fibonacci, which plots significant areas of support or resistance based on key retracement levels. At the beginning of 2004, for example, notice how the preceding rally ran out of gas when the index ran into its 50% Fibonacci (Fibo) retracement, as measured from the peak of 2000 down to the low of 2002. After spending the next ten months trending modestly lower, the index eventually gathered enough momentum to rally above the 50% retracement, but it is now approaching the 61.8% retracement level. With a high degree of certainty, I will say the 61.8% Fibo retracement level is likely to act as a very strong area of resistance for the S&P. If the gains of the past two years were simply a bounce within the context of a long-term bear market, then the 61.8% retracement level is where the S&P would likely resume its downtrend that began in the year 2000. If, however, the index is able to rally above the 61.8% level and hold there for more than a month or two, all bets are off on the bearish argument. We’re not in the business of predicting, so we won’t offer an opinion on which of those two scenarios will unfold. Rather, we present you with the charts so that you will have a clear, unbiased view of what is really happening in the longer-term. Next, take a look at the Nasdaq Composite:

While the S&P has recovered more than half of its loss from the first two years of the new millennium, the Nasdaq has been lagging and remains below even its 38.2% Fibonacci retracement level. Throughout 2004, the Nasdaq ran into horizontal price resistance at the 2,127 area (the horizontal blue line), but it pushed above that resistance during the last month of the year. This should now act as a base of support on any retracement in the index, while the 38.2% retracement, around 2,650, will be the first major area of resistance. We find this divergence between the S&P and Nasdaq to be quite interesting because the Nasdaq may attempt to “catch up” to the S&P, but the S&P may begin to show weakness due to the proximity of its overhead resistance. When the indices are not in sync with each other, it often creates choppy and indecisive action, so the first few months will be paramount at determining which of these major indices takes the lead and, hence, which direction the broad market will take into the new year.

Today’s watch list:

There are no new setups for today, although we remain long SMH.

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 = + $60

Notes:

No changes to SMH stop.

Edited by Deron Wagner,
MTG Founder and
President