The Wagner Daily | February 4, 2005

Commentary:

The broad market followed up Wednesday’s FOMC meeting with mixed results yesterday, as each of the major indices diverged significantly. Weakness was most prevalent in the Nasdaq Composite, which closed the day 0.8% lower, but was off as much as 1.2% intraday. Conversely, the Dow Jones Industrial Average showed relative strength and closed the day nearly unchanged. The S&P 500 lost 0.3%. The small-cap S&P 600 Index closed 0.2% lower. The S&P and Dow have been showing relative strength largely due to institutional buying activity in both the Utilities and Oil Service sectors, which can be traded via UTH and OIH. Subscribers to The MTG Stalk Sheet have been benefitting from long positions in both of those sectors throughout the past week.

Total market volume in the Nasdaq was running approximately 8% higher than the previous day when the index was trading at its lowest level yesterday. When the index rallied modestly in the afternoon, volume declined, which is not a good sign for the bulls. Nevertheless, total Nasdaq volume finished the day 1% higher than Wednesday’s level. Total volume in the NYSE was 2% lighter. Yesterday’s loss in the Nasdaq registered as its fifth “distribution day” within the past four weeks. Considering the index was attempting to rebound this week, a resumption of January’s bearish pattern of higher volume on the “down” days is not good for the market.

When it comes to technical analysis, short-term traders rarely agree on which set of moving averages is most important to watch on the charts. Some traders base their analysis on fast moving averages such as 10 or 13 days, while others use faster moving averages such as 20 or 40 days. Some traders insist on using simple moving averages (SMA), while others prefer exponential moving averages (EMA). Generally speaking, the longer the time horizon of your trades, the more you should focus on a longer moving average period. However, one moving average that nearly every trader monitors closely is the 50-day SMA, which is closely followed by both individual and institutional traders alike. Because it is so closely followed, stocks and indexes will often find significant support or resistance at their 50-day moving averages. In fact, institutions regularly engage in program trading, which automates buys or sells when stocks or indexes trade into support or resistance of their 50-day moving averages. For two current examples of this, check out the daily charts of both the S&P 500 and Dow Jones Industrials below:

On both charts, notice how the 50-day MA acts like a magnet that attracts the prices of the indices. Looking at the first chart above, you will notice the February 1 rally in the S&P stopped exactly at its 50-day MA. The following day, the index opened and immediately found support at its 50-day MA, which marked the February 2 low. Yesterday, the index sold off and probed below its 50-day MA on an intraday basis, but recovered to close right on the moving average line. The Dow Jones Industrial Average has been following a similar pattern with relation to its 50-day MA, except that the index is stuck just below its 50-day MA rather than above it.

In a steady uptrend, many traders use a pullback to the 50-day moving average as an opportunity to buy the stock or index with minimal risk. However, once support of that 50-day moving average is broken, it then becomes the new resistance level that provides a low risk opportunity to enter new short positions if the market is in a downtrend. This is the reason we remain short DIA and IWM, both of which are struggling to get above their 50-day MAs. It also explains why both S&P and Dow are having difficulty getting and staying above their 50-day MAs. The Nasdaq Composite, however, remains weak relative to the S&P and Dow because it is still trading well below its 50-day MA.

The market internals, particularly the price action relative to volume changes, have been showing us some mixed signals. The S&P is trying to hold above and find support at its 50-day MA, but the weakness in the Nasdaq has been preventing the S&P from following through to the upside. This divergence is likely to cause choppy overall market conditions unless the indices begin trading in sync. Because the Nasdaq usually leads the broad market, there is a good chance the weakness in the Nasdaq will pull the S&P and Dow back down with it. As earnings season begins to wrap up, there will also be less news-driven activity, which should also aid in the development of a trend.

Today’s watch list:

RTH – Retail HOLDR
Short

Trigger = below 98.33 (below yesterday’s close)
Target = 93.20 (support of the 200-day MA)
Stop = 100.40 (above the January 3 high)

Notes = RTH was listed on yesterday’s newsletter as well, but never triggered due to an opening gap down (see the MTG Opening Gap Rules). We still like the setup and are listing it again in today’s newsletter. Note the new trigger price above. As you can see on the chart above, RTH has rallied into resistance of its daily downtrend line, so we expect a resumption of the downtrend from here. Remember you can track the price of RTH by following the index for the HOLDR, which is $IRH.X.

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 = ($194)

IWM short (re-entry, from Feb. 1) –
shorted 124.72, stop 126.20, target 121,90, unrealized points = (0.49), unrealized P/L = ($49)

Notes:

No changes to the open positions above.

Edited by Deron Wagner,
MTG Founder and
President