The Wagner Daily | January 10, 2005

Commentary:

The major indices wrapped up last week’s bearish action with little fanfare, as each of the three major indices closed approximately 0.1% lower. Total market volume in the NYSE came in 6% lower, but the Nasdaq’s volume increased less than 1%. For the week, both the S&P 500 and Dow Jones Industrial Average closed lower in four of the five days, and lost 2.1% and 1.7% respectively. The Nasdaq Composite, which has been showing the most relative weakness, registered a loss in each of the five days and shed 4% for the week. Given that last week alone saw three “distribution days” in the Nasdaq, it was quite a negative start to the month and the new year.

The S&P 500 sold off down to its 50-day moving average last Friday morning, but recovered and closed just above it. Nevertheless, the daily chart of the S&P is now looking rather bearish overall because the index has failed to bounce after the sharp selloff from the first two days of January. Instead, the index has merely traded sideways, near the lows of the range. Just as a consolidation near the highs of an uptrend is bullish, consolidation at the lows of a downward move is equally bearish and often leads to new lows. The relatively tight range of the past three days indicates we are likely to see a big move in either direction within the next several days. A break of last week’s low (1,182) would be bearish, as it would put the S&P below support of its 50-day moving average. On the upside, any rally attempt will likely be met with significant resistance at the 20-day moving average, which is at 1,200. The 1,200 level also corresponds with a 50% Fibonacci retracement from the December 31 high down to the January 7 low. The daily chart of the S&P 500 below illustrates the key short-term support and resistance areas to watch over the next several days:

Unlike the S&P, the Nasdaq has already broken below support of its 50-day moving average, and has closed below it for the past three days. The index attempted to rally back above the 50-day MA during the past two days, but each time it fell down and closed below it. Therefore, the obvious area of short-term resistance on the Nasdaq remains the 50-day MA, just over the 2,100 level. The next major area of support is around 2,050, which is support of the prior low from November, as well as the prior high from July. The daily chart of the Nasdaq below illustrates how prior support of the 50-day moving average has now become the new resistance level:

This week kicks off earnings season, which is likely to determine the direction of the broad market’s next move. Many traders will be watching the reaction of Apple Computer’s earnings report on Wednesday. Since AAPL is currently a high-flying market leader, the stock’s reaction to its earnings report will tell us a lot about the current sentiment of the market. Remember that the actual earnings reports don’t matter; rather, it is the market’s REACTION to the earnings reports that will confirm whether or not the sentiment of the market remains bearish, as it has been since the new year began. Because of the commencement of quarterly earnings season, MTG recommends caution against aggressively entering new positions that are likely to be impacted by the earnings reports of sister companies within the same sector. It’s a better risk to stand aside and observe how the market reacts to the first wave of earnings reports.

Today’s watch list:

There are no new plays for today, although we are now short RTH, per last Friday’s newsletter.

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 = ($41)

Notes:

Per last Friday’s newsletter, we are now short RTH (Retail HOLDR).

Edited by Deron Wagner,
MTG Founder and
President