The Wagner Daily | January 24, 2005

Commentary:

After breaking support and closing at a new low of the year last Thursday, the Nasdaq Composite sustained another loss of 0.6% on Friday. The S&P 500 Index also lost 0.6% and the Dow Jones Industrial Average closed 0.7% lower. All three of those indices closed at their worst levels of the new year. Furthermore, each of the major indices closed at their intraday lows for the past three consecutive sessions, typically a sign of institutional selling. The one positive, however, was that Friday’s total market volume declined by 3% in the NYSE and 8% in the Nasdaq, thereby preventing the broad market from suffering another “distribution day.”

The major indices registered their third consecutive week of losses, as the S&P 500 Index lost 1.4%, the Dow dropped 1.6%, and the Nasdaq shed 2.6%. Of the last fifteen sessions, there have been only four “up” days in the Nasdaq and five in the S&P. None of the four “up” days in the Nasdaq occurred on higher volume than the previous day, but half (six to be exact) of the “down” days were on higher volume. Needless to say, this month’s count of zero “accumulation days,” but six “distribution days” in the Nasdaq is quite bearish. The price to volume relationship has been slightly better in the NYSE, but remains negative nevertheless. The amount of overhead supply created by last week’s losses, along with the numerous “distribution days,” means that only a series of higher volume “up” days will be able to reverse the market’s negative direction in the short term.

In the January 21 Wagner Daily, we illustrated how the Nasdaq Composite had broken below support of an uptrend line that had been in place since the low of August 2004. Friday’s losses caused the first confirmed weekly close below support of that trendline:

Prior support of the trendline above (in red) has now become the new resistance in the Nasdaq, currently around the 2,075 to 2,080 area. You may want to mark this level as a probable area of major resistance on any rally attempt this week. While the break of a 5-month uptrend line is bearish, a look at the longer-term monthly chart shows the index still remains above its primary uptrend line from the low of October 2002. If you have been wondering at what point it may become “low-risk” to begin buying stocks and ETFs again, consider waiting for a test of the primary uptrend line (in blue) below:

The first weekly chart above is bearish and shows a break of trendline support, while the longer-term monthly chart is somewhat bullish and portrays that a multi-year uptrend remains intact. When charts of two different timeframes show a conflicting view, the chart with the longer timeframe usually holds the most weight. Therefore, one could say the intermediate-term outlook on the Nasdaq is negative, but, purely from a technical perspective, the longer-term outlook remains positive. However, a break below the monthly uptrend line from the October 2002 low would obviously change that.

Similarly, the S&P 500 remains above support of its primary, monthly uptrend line, as well as above support of its prior highs from 2004. Given the proximity of the index to both its prior monthly highs and its uptrend line, keep a close eye on how it acts in the coming week because these are key support levels that could result in a big move lower if broken. Take a look:

We remain in corporate earnings season, so be cognizant of holding any stocks or ETFs that could be directly impacted by the earnings of a competitor within the same sector. During the past two weeks, the market has been responding negatively to most earnings reports, even the strong ones. Therefore, we recommend not holding any long positions overnight that could be directly impacted by an earnings report of a leading company in the same sector Because the broad market has been trending nicely since the beginning of January, trading the broad-based ETFs such as SPY, DIA, or QQQQ has been working as well as trading the sector-specific ETFs. We will continue to trail a stop on our short positions in SPY and DIA, both of which are showing unrealized gains.

Today’s watch list:

There are no new setups for today, although we remain short both SPY (half position) and DIA from last week.

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 = + $221

SPY short (HALF position, from Jan. 21) –
shorted 117.35, stop 118.35, new target 115.35, unrealized points = + 0.57, unrealized P/L = + $57

Notes:

We have reduced the target price of the SPY short due to support of the prior highs on the monthly chart.

Edited by Deron Wagner,
MTG Founder and
President