The Wagner Daily | January 28, 2005

Commentary:

Yesterday’s broad market action was rather indecisive, as both the S&P 500 and Nasdaq Composite oscillated between positive and negative territory throughout the day, but closed unchanged. The Dow Jones Industrial Average, which rallied into resistance of its daily downtrend line the previous day, once again showed relative weakness and lost 0.3%. Total market volume in the NYSE came in 2% lighter than the previous day, but was fractionally higher in the Nasdaq. Advancing issues beat declining issues in the NYSE, but decliners outpaced advancers in the Nasdaq. The mixed market internals confirmed yesterday’s indecision, as neither the bulls nor bears had control.

The Dow’s downtrend line, which began with the high of January 3, once again acted as resistance yesterday. Looking at the daily chart of DIA (Dow Jones Tracking Stock), you will notice the index is now being squeezed between resistance of its January downtrend line and horizontal price support of its prior lows, as annotated below:

In addition to support of the November and December lows illustrated above, DIA is also holding at support of its 38.2% Fibonacci retracement from its October 2004 low to the January 2005 high. The compression between these support and resistance levels illustrated above is likely to cause a big move in the Dow within the next day or two, but the big question is which direction it will go. Given the additional overhead resistance of both the 20 and 50-day moving averages, it seems more likely the Dow’s next move will be lower. However, we are maintaining a stop just above the 50-day MA on our DIA short position because the prior lows and Fibonacci support could easily cause a significant bounce.

Like the Dow, the Nasdaq Composite has also rallied into resistance of its January downtrend line, although its short-term support is all the way down at its 200-day moving average:

As for the S&P 500, it remains approximately eleven points below resistance of its daily downtrend line, which remains converged with the 20-day moving average (see yesterday’s newsletter). Because each of the major indices have been in a sideways holding pattern for the past several days, be cautious about aggressively entering new positions on either side of the market. Overall sentiment this month, especially the negative volume patterns, have favored the downside. But the broad market also has plenty of price support from last year that could easily trigger a significant wave of buying. Our opinion is the current bounce offers a low-risk opportunity to initiate new short positions, but just be sure to maintain tight stops to keep risk minimal.

Today’s watch list:

IWM – Russell 2000 Index Tracking Stock
Short

Trigger = below 122.23 (below support of hourly uptrend line)
Target = 114.20 (just above prior low from October 2004)
Stop = 125.10 (above January 18 high)

Notes = As the weekly chart above illustrates, IWM has broken its weekly uptrend line. It reversed lower after running into resistance of its 20-day moving average yesterday, and we anticipate a move lower due to the amount of overhead supply and relative weakness in the small caps right now.

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 = + $76

SPY short (HALF position, from Jan. 21) –
shorted 117.35, stop 118.35, target 115.35, unrealized points = (0.08), unrealized P/L = ($8)

Notes:

No changes to the positions above.

Edited by Deron Wagner,
MTG Founder and
President