The Wagner Daily | March 7, 2005

Commentary:

The S&P 500 and Dow Jones Industrial Average both broke out to close at new 3 1/2 year highs last Friday, but the Nasdaq continued to lag and remains below its 50-day moving average. A 1.0% gain in both the S&P and Dow enabled both indices to rally and close above their respective prior highs from December, resistance levels we have been following closely over the past several weeks. However, total market volume in the NYSE only increased by 1%. Given the significance of a breakout to new multi-year highs, it was surprising (and not very bullish) that volume did not surge much higher. The Nasdaq Composite only gained 0.6% on Friday and did so on volume that was 4% lighter than the previous day. Obviously, a breakout to new multi-year highs in both the S&P and Dow should have also spurred a strong rally in the Nasdaq, but it did not.

All throughout last week, we had been discussing how the S&P 500 was nearing a critical “make it or break it” level due to resistance of its prior highs at the 1214 area (which correlated to the prior closing highs from both mid-February and last December). We mentioned that a confirmed closing price above that level would be quite bullish, as it would put the index at new multi-year highs. Conversely, failure to get above that level would cause a mini “triple top” to be formed and would likely send the index sharply lower. Therefore, Friday’s breakout and closing price of 1222 put the index at a level not seen since June of 2001. The daily chart of the S&P below illustrates the breakout above the prior resistance of 1214, which should now become the new support level on any price retracement:

Since the beginning of the year, the Dow has been trading in a similar pattern to the S&P, so Friday’s breakout also put the Dow at a new high not seen since June of 2001. Similarly, the Dow was nearing a “make it or break it” level of its prior highs at the 10855 level, but Friday’s closing price of 10940 put the index well above that. Like the S&P, the Dow’s prior resistance at the 10855 area should now act as price support on any retracement. Remember that prior resistance becomes the new support level once the resistance is broken. The daily chart of the Dow below illustrates the breakout above its prior highs:

Unfortunately, the Nasdaq has yet to catch up with the strength of the S&P and Dow, as the index remains 4.9% below its 52-week closing high of 2178. Worse, the index still remains 12 points below its 50-day moving average. While we would like to be confident about buying the breakout in the S&P and Dow, the divergence in the Nasdaq provides sound reason for caution. Historically, the S&P and Dow have rarely shown leadership for an extended period of time without the Nasdaq leading the way higher. Therefore, we feel the S&P and Dow remain in danger of failing to hold their current breakout levels UNLESS the Nasdaq catches up quickly. What are the odds of that happening? It will all come down the Semiconductor Index ($SOX), which typically leads the Nasdaq because of its heavy weighting within the index.

The $SOX showed relative weakness and closed marginally lower on Friday, but the bigger picture of the index on a daily chart continues to look pretty good. Most importantly, the $SOX is still holding above support of its uptrend line that began with the low of January 25. It is also holding above its 200-day moving average, which was a major area of resistance for several years prior. Friday’s close of 433 put the $SOX back below its 200-week moving average of 440, but a bit of indecision is not uncommon when attempting to break above such a major area of resistance. In fact, last week’s minor retracement in the $SOX was actually healthy because it will enable the sector to form a base of support that should lead to new highs in the coming week.

Because of the light volume that accompanied Friday’s breakout in the S&P and Dow, along with the Nasdaq’s relative weakness, we’re not very excited to buy the breakout to new highs in both indices. However, we certainly would not be short here either. If the Nasdaq gets a little momentum going and can get back above its 50-day moving average, that should help the S&P and Dow to remain strong as well. But until that happens, we believe caution is in order if buying the broad-based ETFs such as SPY or DIA. Instead, consider sticking with the sector-specific ETFs, as we remain long both SMH (Semiconductor HOLDR) and PPH (Pharmaceutical HOLDR).

Today’s watch list:

QQQQ – Nasdaq 100 Index Tracking Stock
Long

Trigger = above 38.06 (above 50-day MA and daily downtrend line)
Target = 39.95 (just below high of January)
Stop = 37.25 (below Friday’s low)

Notes = As mentioned in the commentary above, we expect follow-through strength in the Semis to enable the Nasdaq Composite to breakout above its 50-day moving average in the next few days, which would also generate a similar corresponding move in the Nasdaq 100. As such, we are looking to buy QQQQ on a breakout above its 50-day moving average, which also would represent a break of the downtrend line from December’s high.

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 = + $216

PPH long (from Feb. 22) –
bought 72.19, new stop 71.85, target 76.75, unrealized points = + 0.89, unrealized P/L = + $89

Notes:

Note the new stop on PPH above.

Edited by Deron Wagner,
MTG Founder and
President