The Wagner Daily | January 14, 2005

Commentary:

Similar to Wednesday, the broad market spent most of the session in a choppy, trendless range until volatility increased during the last hour of trading. But, instead of rallying into the close, the major indices sold off sharply and gave back their gains from the previous day. The S&P 500 Index closed 0.9% lower, the Nasdaq Composite dropped 1%, and the Dow Jones Industrial Average gave up 1.1%. Each of the major indices closed at their lowest levels of the day, and barely above their respective lows of the previous day.

Volume in the NYSE came in 3% lighter, while volume in the Nasdaq declined by 6%. But, like the previous day, yesterday’s total volume figures were a bit deceiving due to the changes that occurred during the intraday moves. On Wednesday’s session, volume was coming in higher during the weakness throughout most of the day, but then dropped off when the market rallied during the final hour. Yesterday’s action was the opposite, as volume was light throughout most of the day’s sideways chop, but accelerated during the selloff of the final hour. This type of detailed analysis is useful for determining what has really been happening “beneath the hood” for the past two days, as volume was lighter on the way up, but heavier on the way down. This, of course, is bearish.

Based on Wednesday’s strength into the close and the corresponding “bullish hammer” candlestick patterns that followed, yesterday was well positioned to be an “up” day, but follow-through was nowhere to be found. This, however, is not too surprising given the lack of volume intensity that correlated to Wednesday’s closing rally. The abundance of overhead supply that has been created since the beginning of the month also aided in sparking the selloff in the afternoon.

Just as it is difficult to profit from shorting ETFs and stocks when the broad market is in an uptrend, it is equally challenging to profit from buying ETFs or stocks when the market is in a confirmed downtrend. A majority of stocks follow the overall trend of the market, so it’s always wise to use a “top-down” approach that first considers the overall direction of the broad market before determining which sector and individual ETF or stock to trade. This is also why we have been saying to view any bounces in the market as a low-risk entry point to initiate new short positions rather than attempting to catch a bounce on the long side of the markets.

The past week has seen earnings reports from, among others, Intel and Apple Computer. More large and closely-followed companies are scheduled to report their earnings next week, so continue watching the market’s reaction to the reports. Despite blow-out numbers, Apple Computer gave back more than half of its gain from the opening gap. Since stocks seem to be ignoring their positive earnings reports of late, it’s probably not a good idea to count on any particular company reversing the bearish sentiment next week.

NOTE: The stock markets will be closed on Monday, January 17 in honor of Martin Luther King. As such, The Wagner Daily will not be published that day. However, regular publication will resume next Tuesday the 18th.

Today’s watch list:

There are no new plays for today.

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 = ($59)

Notes:

None

Edited by Deron Wagner,
MTG Founder and
President