The Wagner Daily | January 21, 2005

Commentary:

A negative earnings report from former market leader eBay triggered another day of solid losses that spared no individual industry sectors. A whopping 19% loss in eBAY caused the Goldman Sachs Internet Index ($GIN) to lose 3.5% yesterday. However, slight relative strength in the Semiconductor Index ($SOX) helped to minimize the losses in the Nasdaq Composite, which shed another 1.3%. Similar to the previous day, the S&P 500 Index dropped 0.8% and the Dow Jones Industrial Average closed 0.6% lower.

Total market volume in the Nasdaq was fractionally higher, but volume in the NYSE came in 13% higher than the previous day. This means the major indices suffered yet another “distribution day,” the sixth one for the Nasdaq this month. During the broad market uptrend of the fourth quarter of 2004, it was common to see one or two “down” days on higher volume within any given month, but no months saw this many days of distribution. In a healthy market, you would typically see numerous “up” days on higher volume, with most of the “down” days registering lighter volume. But the market has been demonstrating completely the opposite price-volume relationship since the new year began, which of course is bearish.

In yesterday morning’s Wagner Daily, we discussed the likelihood of a possible break to new lows of the month for both the S&P and Nasdaq, which is exactly what happened. When the major indices rallied on January 18, the gains were quickly undone the following day. The markets’ inability to sustain its gains for just one day made the bulls quite nervous. Therefore, the surprise negative report from eBay was all it took to trigger a slide to new lows, which has now trapped the bulls who were expecting to see upside follow-through to the January 18 rally. Yesterday’s selloff caused significant technical damage to the charts of the major indices, especially the Nasdaq Composite:

Looking at the candlestick chart above, you will see the Nasdaq gapped open below support of its January low and briefly attempted to reverse, but ultimately closed at its intraday low. The red horizontal line marks the new short-term resistance on the Nasdaq, at the 2,065 level. Notice how yesterday’s high in the Nasdaq perfectly coincided with resistance of the prior lows. This is a clear example of the most basic tenet of chart analysis; prior support usually becomes the new resistance level after the support is broken. The next major area of support is the 200-day moving average, presently at the 1,976 level. Not only was yesterday’s selloff damaging to the daily chart of the Nasdaq, but the longer-term weekly chart shows a key break of trendline support that had been in place for the past five months:

Unlike the Nasdaq Composite, the broader-based S&P 500 Index is still holding above its trendline support from the August 2004 low. The index also is barely hanging on to support of its January low, although it did close at a new low of the month yesterday. The daily chart below illustrates how yesterday’s low is pivotal at determining the direction of the S&P in the short-term:

If it holds, yesterday’s low could still cause the S&P to find support and stage another rally attempt, but weakness in the Nasdaq may hold it down. It also doesn’t help that the market has shown no signs of accumulation, but has demonstrated numerous days of distribution (higher volume on the down days). Although not illustrated, the daily chart pattern of the Dow Jones, which we shorted via the DIA exchange traded fund yesterday, is similar to the S&P. The one difference, however, is that it actually closed below its prior low of January, just like the Nasdaq.

In times of significant trend reversals in the broad market, it’s crucial that you stick to your plan and obey your stops. If you’re still holding long positions that have violated your stop price because you are hoping for a recovery, you are asking for trouble. While a recovery is certainly possible, we have learned the expensive way, through many years of experience, that “hope” is an extremely dangerous word to use in trading. Although we are not big fans of over-used cliches, there is one that seems appropriate to remind subscribers of at this time: The trend is your friend! As such, we continue to view any bounces in the market as a chance to initiate new short positions, rather than buying new long positions. Only the cessation of the numerous “distribution days,” combined with the beginning of a few higher volume “up” days, would cause us to feel otherwise. Trade what you see, not what you think!

Today’s watch list:

SPY – S&P 500 Index Tracking Stock
Short

Trigger = HALF position below 117.35 (below yesterday’s close and prior January lows)
Target = 113.50 (just above the 200-day MA)
Stop = 119.20 (above hourly downtrend line)

Notes = Per the commentary above, we are looking to short the S&P on a break to new lows of the month. However, notice we are only looking to short HALF position size (based on the MTG Position Model). Remember we are also short a full position of DIA from yesterday’s entry.

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 = + $38

Notes:

Per intraday e-mail alert, we shorted DIA yesterday.

Edited by Deron Wagner,
MTG Founder and
President