Commentary:

Yesterday’s broad market action resembled a roller-coaster, as it oscillated between positive and negative territory before finally closing near unchanged levels. After beginning the day with an opening gap down, the major indices quickly found support and rallied to not only “fill the gap,” but also above their respective highs of the previous day. When the broad market exhibits this type of action, it usually leads to continued strength and gains throughout the day, but such was not the case yesterday. Instead, the major indices dropped back down to the lower third of their intraday ranges in mid-afternoon. Bulls showed up during the final hour to push the broad market higher, but most of the indices closed in the middle of their intraday ranges. The S&P 500 closed unchanged, while the Dow Jones Industrials lost 0.2%. The Nasdaq Composite began the day with a 0.6% loss, rallied to as much as a 0.6% gain, but closed the day 0.2% lower. It was definitely a tug-of-war between the bulls and bears.

Total market volume in the NYSE came in 8% lower than the previous day, but was 3% higher in the Nasdaq. Because the Nasdaq closed lower and on higher volume, yesterday was technically a “distribution day” for the Nasdaq. However, given the indecision of yesterday’s session and the fact that the index closed nearly flat, it’s probably not accurate to classify yesterday as a confirmed day of institutional selling. Just as price action was indecisive throughout the day, market internals were quite mixed as well. Market and volume breadth alternated from positive to negative territory several times throughout the day.

One technical factor that may have caused the indecision in the market yesterday was the Nasdaq’s attempt at breaking out above its 50-day moving average, its second attempt within the past three weeks. Since dropping below support of its 50-day moving average on January 5, the Nasdaq has rallied to test resistance of its 50-day MA on two occasions. The first breakout attempt occurred on February 15, which also marked the high of the February rally. The second attempt was yesterday. On both occasions, the Nasdaq touched its 50-day moving average on an intraday basis, but sold off to close the day in the lower half of its range. Just as the 50-day MA typically provides a strong level of support for uptrending sectors and stocks, it is equally important as a resistance level. Rarely will an index rally back above its 50-day MA on its first attempt without first retracing to make another run. The daily chart of the Nasdaq Composite below illustrates how the 50-day MA (the light blue line) has acted as resistance during the past several weeks:

Each subsequent test of the 50-day moving average increases the odds of an eventual breakout, but we would remain a bit cautious with entering new positions in the Nasdaq until the breakout actually happens. Clearly, the 50-day MA is the most important resistance level on the Nasdaq to watch over the next several days.

Regardless of the 50-day MA resistance on the Nasdaq, the good news is that the Semis continue to show relative strength. In yesterday’s newsletter, we said the 200-week moving average, currently at the 440 level, should now act as the new support on the $SOX index. Interestingly, that is exactly where the $SOX index closed yesterday. As such, we still feel good about maintaining our long positions in the $SOX, but, as always, are keeping protective stops in place just to be certain.

Both the S&P and Dow attempted to rally above their prior highs yesterday morning, but both indices sold off in the afternoon and closed within their prior trading ranges. The December 2004 highs in the S&P and Dow are acting as quite a difficult area of resistance, and these are clearly the resistance levels to continue watching in the coming days. Again, reference the February 28 issue of The Wagner Daily to review these resistance levels on both the S&P and Dow.

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Today’s watch list:

We continue to feel there is a better to risk to trade the industry sector-specific ETFs, rather than the broad-based ones. As such, we are not looking to enter any new ETF trade setups today, but we remain long both SMH and PPH (each with a solid unrealized gain).

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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:

SMH long (HALF position, from Feb. 7) –
bought 32.55, stop 33.20, no target (trailing a stop), unrealized points = + 1.75, unrealized P/L = + $263

PPH long (from Feb. 22) –
bought 72.19, stop 71.10, target 76.75, unrealized points = + 0.41, unrealized P/L = + $41

Notes:

No changes to the stops on our open positions.

Edited by Deron Wagner,
MTG Founder and
President