The Wagner Daily | January 27, 2005

Commentary:

The broad market followed through on Tuesday’s reversal with its second consecutive day of gains yesterday, but this time on higher volume across the board. Strength in the tech-related sectors enabled the Nasdaq Composite to show leadership and close with a 1.3% gain yesterday. The S&P 500 gained only 0.5%, while the Dow Jones Industrial Average moved 0.4% higher. Like the previous day, most of the broad market’s gains were the result of an opening gap, as each of the major indices subsequently traded sideways in a tight range throughout the day.

For the first time since 2005 began, the Nasdaq registered an “accumulation day” because the index closed higher and on volume that was 5% higher than the previous day. Better was the fact that most of the volume increase occurred during the Nasdaq’s modest rally of the final thirty minutes, typically a sign of institutional interest. Volume in the NYSE marginally increased by just over 1%, but technically counted as its second straight “accumulation day.” While the higher volume gains were positive signs for the broad market, it’s been hardly enough momentum to absorb the overhead supply created by the six “distribution days” the major indices have seen so far this month.

Yesterday’s broad market action was a good example of how the previous day’s highs and lows typically act as short-term resistance and support levels the following day. Looking at the 15-minute chart of the S&P 500 below, notice how much trouble the index had rallying above the previous day’s high:

The Nasdaq 100 similarly found resistance at its prior day’s high, but managed to rally above it during the final thirty minutes of trading. The break of the previous day’s high should position the Nasdaq to show more relative strength than the S&P going into today. The chart below illustrates how the prior day’s high perfectly acted as resistance until the final thirty minutes:

Of the three major indices we monitor daily, the Dow Jones Industrial Average gained the smallest percentage yesterday. It’s relative weakness can be attributed to the fact that the index rallied into resistance of its primary downtrend line one the daily chart, which we pointed out to you several days ago. Take a look:

Even if the Dow manages to break out above its downtrend line shown above, it will need to contend with resistance of its 20 and 50-day moving averages, which have converged overhead at the 10,590 area.

The S&P 500 remains approximately twelve points below resistance of its daily downtrend line, which has neatly converged with both the 20 and 50-day moving average. Only a major surge of volume will push the index through triple convergence of its downtrend line, 20, and 50-day moving averages:

Don’t forget that we remain smack in the middle of corporate earning’s season, which is never a good time to aggressively enter new positions. As always, be sure to trail your stops and be disciplined. Most importantly, remember to Trade what you see, not what you think!

Today’s watch list:

Due to being in the middle of earnings season, there are no new setups for today. We do, however, remain short both SPY (half position) and DIA from last week. Keep an eye on SMH (Semiconductor HOLDR), which has been showing relative strength the past two days. It is, however, still firmly in a downtrend.

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 = + $32

SPY short (HALF position, from Jan. 21) –
shorted 117.35, stop 118.35, target 115.35, unrealized points = + 0.12, unrealized P/L = + $12

Notes:

No changes to the positions above.

Edited by Deron Wagner,
MTG Founder and
President