The Wagner Daily | January 25, 2005

Commentary:

The broad market resumed the steady downtrend of the prior three days, as the Nasdaq sustained its seventh “distribution day” this month. The S&P 500 and Dow Jones Industrial Average lost only 0.4% and 0.2% respectively, but the Nasdaq lost another 1.3% yesterday, bringing its month-to-date loss to nearly 8%. Worse was that volume in the Nasdaq came in 4% higher than the previous day, causing the index to register another day of institutional selling (aka “distribution day”). Volume in the NYSE, however, declined by 9%. While the market action of the past four days has been ugly for the long-term investors who are biased on only one side of the market, it has been great for short-term “swing traders” such as ourselves because the trend has been smooth and in a wide range. Professional traders typically don’t care which direction the market is trending, just as long as there is a trend.

In yesterday’s newsletter, we looked at the weekly and monthly charts of the major indices, which are great for presenting you with the “big picture” of what is happening over the intermediate and long-term. However, it’s important not to lose focus of the daily charts because they are ideal for portraying the short-term view of the broad market. So, let’s take a look at what to expect over the next several days, beginning with the daily chart of the Nasdaq Composite:

The most notable thing about the Nasdaq daily chart is that the 20-day moving average (the blue line) has crossed down through the 50-day moving average (the red line). This is known as a “bearish crossover” and often indicates a primary reversal of trend. The crossover means that major resistance on the index will now be found between the 2,105 to 2,115 area, which also coincides with resistance of the highs from the past two weeks. Also, notice how the upper channel of a downtrend line (the brown descending line) has formed over the past month, beginning with the high of January 3. Expect this new downtrend line to act as resistance on any short-term rally attempt in the Nasdaq. As for support, the 2,000 level may act as minor “psychological support” because large round numbers often act as support or resistance levels on the indices. Below the 2,000 level, the 200-day moving average is bound to provide at least a decent bounce at the 1,975 area. Next, take a look at the S&P 500:

The S&P 500 Index has a similar daily chart pattern in that it also has been in a downtrend since the high of January 3. Its 20-day moving average has not yet crossed through the 50-day, but the current downtrend line has converged with the 20-day MA. When a downtrend line converges with the 20-day moving average, it often provides a solid area of resistance that an index will not easily recover from. Although not pictured on the daily chart, the 1,160 area (prior highs from 2004) should act as decent support that may trigger a small bounce in the short-term.

Given the extent of the broad market’s losses during the past three weeks, the major indices have become a bit overextended to the downside. This certainly does not mean we should blindly buy stocks or ETFs here, but it does mean that a bit of caution is now warranted on the short side, especially considering the solid support level the S&P has come down to on the weekly chart. If you’ve been short for several days or weeks, it’s a good time to tighten the stops to protect your profits. If, however, you are not already short, the risk/reward for entering new short positions in the broad market is now a bit negative. Specific industry sectors may provide you with more opportunities. Most importantly, remember that blindly entering new long positions in anticipation of a bounce is a dangerous game if you don’t wait for confirmation of a basing pattern first. Just as you need to take profits quickly on the short side of a bull market, you also should take profits quickly when on the long side of a bearish market.

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 = + $240

SPY short (HALF position, from Jan. 21) –
shorted 117.35, stop 118.35, target 115.35, unrealized points = + 0.80, unrealized P/L = + $80

Notes:

No changes to the positions above.

Edited by Deron Wagner,
MTG Founder and
President