The Wagner Daily | January 12, 2005

Commentary:

After beginning the day with an opening gap down, the major indices failed to recover, traded sideways to lower throughout the day, and once again closed near their intraday lows. Both the S&P 500 and Dow Jones Industrial Average lost 0.6%, while the Nasdaq Composite dropped 0.8%. The Russell 2000 Small Cap Index continued to show the most relative weakness and closed 1.0% lower. As such, our short setup in IWM (Russell 2000 Index) triggered yesterday and we now have a small unrealized gain in the position.

Total market volume in the NYSE was unchanged, but the Nasdaq’s volume came in 7% higher than the previous day. Because the Nasdaq closed nearly one percent lower and on higher volume, yesterday marked the third confirmed “distribution day” since the new year began, and the fifth within the past four weeks. While a healthy market can usually absorb one or two days of institutional selling during the course of a month, the overhead supply created from four or more “distribution days” within that period will usually put an end to a bullish environment.

For the first time since October 26, the S&P 500 Index closed below its closely watched 50-day moving average yesterday. The index briefly found support at the 50-day MA during the prior two days, but the broad market’s inability to bounce caused the index to close at its lowest point of the new year. The daily chart of the S&P 500 below illustrates the first close below the 50-day MA since last October:

Looking at the chart above, notice how the S&P has simply traded sideways, consolidating at the lows, since the big down days of January 3 and 4. In a moderately bullish environment, the index would typically have bounced and retraced at least one third to half of its losses before going lower. But the major indices often correct by time, rather than price, when the sentiment is bearish. The sideways consolidation at the lows during the past five days is exactly that — a correction by time.

Needless to say, a break below yesterday’s low in the S&P 500 would likely result in another leg down in the broad market because all the bulls who have been waiting for a bounce the past five days would be trapped. Their selling would accelerate the break of price support, which would in turn attract short sellers. Furthermore, the 50-day moving average is a closely watched indicator by many institutions and professional traders. The longer the index remains below its 50-day MA, the more bearish the sentiment is likely to become. The daily chart of the S&P 500 above shows the next major area of price support at the 1,170 area (prior lows from November). Short-term resistance is at 1,195 (the high of January 10) and then at 1,200 (20-day moving average).

Looking at the Dow Jones Industrial Average, you will see the index closed right on support of its 50-day moving average. Like the S&P, it too closed at its lowest level of the new year after consolidating for the past week. Watch for new lows if the index breaks its 50-day MA and fails to recover today:

Intel reported solid earnings after the close yesterday and was trading approximately 2% higher in after-hours trading. Keep an eye on the Semiconductor Index (and SMH) to see if the initial positive reaction follows through in today’s trading or whether the bearish sentiment of the market causes the enthusiasm to fade. High flyer Apple Computer (AAPL) reports earnings after the close today, so we will also be closely analyzing the stock’s reaction in tomorrow’s session. Pay attention to how stocks react to positive earnings reports over the next week because a truly weak market will typically cause a negative reaction to even the best earnings reports.

Today’s watch list:

There are no new plays for today, although we remain short both RTH and IWM.

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 = + $68

RTH short (from Jan. 7) –
short 96.72, stop 99.20, target 92.60, unrealized points = (0.72), unrealized P/L = ($72)

Notes:

Still short RTH with no changes to the stop.

Edited by Deron Wagner,
MTG Founder and
President