The Wagner Daily | February 2, 2005

Commentary:

The major indices followed up Monday’s positive start to the week with another day of gains yesterday. The Nasdaq Composite lagged behind this time and closed only 0.3% higher, while the S&P 500 and Dow Jones Industrials gained 0.7% and 0.6% respectively. Unlike the previous day in which the gains were solely the result of an opening gap up, the major indices trended higher intraday and closed near their best levels of the session. We saw the opposite action throughout January, in which the broad market was consistently starting the day on firm ground, but selling off in the afternoon and especially during the final hour.

Total market volume came in higher on both the NYSE and Nasdaq this time, though the increases remained mild. Volume in the Nasdaq rose 4%, but remember that the previous day was the lightest volume day of the year. Volume in the NYSE came in only 1% higher than the previous day, but still technically counted as the second consecutive “accumulation day” because the S&P and Dow both closed higher and on higher volume. Breadth was also bullish, as advancing volume firmly outpaced declining volume on both exchanges.

Yesterday’s strength in the S&P 500 pushed the index above its daily downtrend line that had been in place since the high of January 3. It also closed back above its 50-day moving average for the first time in two weeks, although only by one point. The key short-term area of resistance on the S&P now becomes the prior high of the downtrend, which was set on January 18. Near-term support should now be found at the prior downtrend line that was broken yesterday. The daily chart of the S&P 500 below illustrates these levels:

The main reason for the relative weakness in the Nasdaq yesterday was the resistance level at the 2,065 to 2,068 area that we discussed in yesterday’s newsletter. Notice how the Nasdaq has not yet pushed through the horizontal price resistance from the prior mid-January lows:

Though the S&P closed above its daily downtrend line yesterday, we cannot technically declare a trend reversal until the prior high of January 18 is broken, and then a subsequent “higher low” is also formed. Until then, the broad market is likely to remain choppy, stuck between resistance of the prior high from January 18 and the support of the prior downtrend line. The mixed signals indicate we are now seeing the setup for a potential tug-of-war between the bulls and bears, so this may be a good time to remain positioned mostly in cash for at least the next several days.

Today, the FOMC will announce their decision on interest rates at 2:15 pm EST. Most analysts are expecting another quarter point increase in the Fed Funds rate, but a handful of analysts also feel the Feds may leave rates unchanged. Either way, it doesn’t really matter to technical traders such as ourselves. The only thing that matters will be the market’s reaction to whatever the Feds decide. Remember to trade what you see, not what you think!

Today’s watch list:

Due to the pending FOMC decision on interest rates, there are no new plays for today.

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:

net P/L = ($112)

IWM short (from Jan. 28) –
shorted 122.20, covered 125.11, points = (2.91), net P/L = ($293)

Open Positions:

unrealized P/L = ($90)

IWM short (re-entry, from Feb. 1) –
shorted 124.72, stop 125.85, target 121,90, unrealized points = (0.22), unrealized P/L = ($22)

Notes:

Due to its relative weakness in the afternoon, we re-shorted IWM yesterday (per intraday e-mail alert to subscribers).

Edited by Deron Wagner,
MTG Founder and
President