The Wagner Daily | January 11, 2005

Commentary:

The major indices spent the first half of yesterday in a moderate uptrend, but selling in the late afternoon spoiled the rebound attempt and limited the gains. The Nasdaq finally broke its six-day losing streak, but only gained back 0.4% of its 4.1% loss it has mounted since the new year began. Total volume in the Nasdaq was 4% lighter than the previous day, which is bearish because volume during the prior five days of losses came in higher. The S&P 500 Index found support at its 50-day moving average, but only closed 0.3% higher. The Dow Jones Industrial Average gained 0.2%. Total market volume in the NYSE was 1% higher than the previous day.

In yesterday morning’s Wagner Daily, we discussed how the 50-day moving average was likely to act as firm resistance on the Nasdaq Composite, which is exactly what happened yesterday afternoon. The index managed to rally six points above its 50-day MA on an intraday basis, but sold off in the late afternoon and once again closed below it. The Nasdaq’s inability to rally back above its 50-day moving average is causing a “bear flag” pattern to form on its daily chart:

Since netting a 4-point gain from shorting IWM (Russell 2000 Small Caps) last week, we have been monitoring the performance of the small caps relative to the Nasdaq Composite and S&P 500. Interestingly, the Small Cap indices continue to show relative weakness to the broad market, as the Russell 2000 Small Cap Index ($RUT) is already breaking below support of its primary uptrend line from the August 2004 low. The weekly chart of $RUT below illustrates this:

Because the small caps have broken support ahead of the other major indices, you may want to consider re-shorting IWM. However, be aware that support of the prior highs from January through April 2004 are just below. Therefore, a tight stop is required in order to prevent shorting in front of a potentially large bounce. But if the relative weakness continues and the bounce doesn’t come, the risk/reward of shorting IWM is quite positive.

Remember that 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 Intel’s earnings report today after the close, as well as Apple Computer’s report tomorrow. 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:

IWM – Russell 2000 Small Cap Index Tracking Stock
Short

Trigger = below 122.30 (below yesterday afternoon’s low)
Target = 115.95 (support of the 200-day MA)
Stop = 124.35 (just above yesterday’s high)

Notes = As discussed in the commentary above, we are anticipating another leg down in the Small Caps, due to the relative weakness. However, because there is support from the prior highs around the 120 area, we will keep a tighter stop than usual with IWM, and will trail it tight as well.

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 = ($88)

Notes:

Still short RTH with no changes to the stop.

Edited by Deron Wagner,
MTG Founder and
President