The Wagner Daily | January 13, 2005

Commentary:

The broad market spent most of the day in a choppy, sideways pattern, but buyers stepped in during the final hour of trading and lifted the major indices up to positive territory. The S&P 500 Index gained 0.4%, while both the Nasdaq Composite and Dow Jones Industrials closed 0.6% higher. More notable than the percentage gains, however, was the fact that each of the major indices closed at their intraday highs. It was the first time since the new year began two weeks ago that the broad market was not subjected to weakness into the close.

Total market volume in the NYSE increased by 5% yesterday, but the Nasdaq’s volume came in less than 1% higher. The higher closing prices on higher volume technically indicate yesterday was a bullish “accumulation day,” but a closer look at the intraday volume patterns reveals a disappointing lack of bullish confirmation. At 11:00 a.m., the Nasdaq was at its intraday low and showing a 0.5% loss. At the time, volume was on pace to come in approximately 15% higher than the previous day, which would have meant another “distribution day.” The Nasdaq eventually recovered and closed the day positive, but volume dropped off as the market was rallying, as volume came in only 0.2% higher by day’s end. Volume in the NYSE also receded as its price moved up late in the day. Obviously, it would have been a more bullish sign if volume increased as the major indices rallied in the late afternoon, but that was not the case.

Yesterday’s gain in the S&P 500 enabled the index to close back above its 50-day moving average, although the S&P still needs to contend with price resistance from the past week. The selloff in the morning, but subsequent reversal and closing price at its intraday high, caused the S&P 500 to form a “bullish hammer” candlestick pattern on its daily chart. The formation of a “hammer” often leads to higher prices in the days that follow, but we’re not too confident about that given the lack of volume intensity during yesterday’s rally. Furthermore, there remains a lot of overhead supply that was created from the numerous “distribution days” of the past two weeks. We have circled the “bullish hammer” candlestick on the chart below:

As you can see, short-term resistance on the S&P remains between the 1,194 to 1,200 range (high of the recent trading range and 20-day moving average). Support is now found all the way down to yesterday’s low of 1,175. The Nasdaq Composite also formed a similar candlestick pattern on its daily chart, but remains sixteen points below resistance of its 50-day moving average. Yesterday was the sixth consecutive day the index has closed below its 50-day MA.

Apple Computer (AAPL) blew away earnings estimates after the close yesterday and was last seen trading 12% higher in the after-hours market. It’s possible that enthusiasm from the report may carry over to other technology-related sectors in today’s session, but the key will be whether or not Apple can retain its after-hours gains once the regular session begins. In the bullish environment of last month, a large opening gap like Apple’s would have typically led to new highs during the regular session, but “gap ups” often fail during times of bearish sentiment. Using the MTG Opening Gap Rules will keep you out of trouble because they force you to wait for confirmation of a new high after the first twenty minutes of trading. This often works well at preventing you from buying at the high of the day, only to watch the ETF or stock drift lower throughout the day.

Going into today, we recommend a bit of caution on the short side of the markets. We have profited nicely from individual stock and ETF trades during the weakness of the past two weeks, but the strength into yesterday’s close, combined with Apple’s positive report, could easily cause bullish follow-through for at least a day or two. The charts have not given us enough reason to enter new long positions in the broad-based ETFs here, so our plan is to wait for a bounce into major resistance and then initiate new short positions. Patience is key in all markets, but especially one that is exhibiting bearish tendencies.

Today’s watch list:

There are no new plays for today, although we are watching both SMH and OIH for potential long entries. As always, we will send an intraday e-mail alert to subscribers if/when we enter any new positions intraday.

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:

net P/L = + $59

Open Positions:

unrealized P/L = ($147)

Notes:

Per intraday e-mail alert, we covered half of IWM into morning weakness, then trailed a stop down to breakeven, giving us an average cover price of 121.67. We anticipated more profit from that trade, but played it tight because, given the extent of the market’s losses over the past two weeks, we did not want to assume much risk on the short side.

Edited by Deron Wagner,
MTG Founder and
President