The Wagner Daily | March 11, 2005

Commentary:

The major indices trended lower throughout yesterday morning and appeared to be on pace for another day of distribution, but buyers stepped in at mid-day and reversed the trend in the afternoon. At its intraday low, which was set after the first two hours of trading, the Nasdaq Composite was trading 0.9% lower, but the index recovered to close only 0.1% lower and near its high of the day. The Semiconductor Index once again positively diverged and gained 1.3% on the day. The S&P 500 and Dow Jones Industrial Average followed a similar intraday pattern as the Nasdaq, but both indices showed more relative strength throughout the day. The afternoon rally in the broad market enabled the S&P 500 to close 0.2% higher, while the Dow Jones gained 0.4% on the day.

At mid-day, when each of the major indices were showing losses, total market volume in the NYSE was on pace to come in higher than the previous day. Had the afternoon rally not happened, the S&P and Dow probably would have sustained their consecutive “distribution day.” The subsequent gains for the S&P and Dow was positive, but volume declined slightly as the market rallied yesterday afternoon. For the day, volume in the NYSE registered 6% lighter than the previous day. Given the day’s gains, an increase in volume would have been more bullish, but at least the S&P and Dow reversed their morning losses. Total market volume in the Nasdaq similarly declined by 4%, which was actually a positive because the index closed the day slightly lower.

If you’ve been following the broad market on a daily basis throughout the past month, you’re probably getting a bit frustrated by the choppiness and indecision that has plagued the Nasdaq, especially within the last two weeks. This indecision speaks for itself on the daily chart of the Nasdaq below:

After failing to breakout above resistance of its 50-day moving average on February 15, notice how the Nasdaq Composite sold off sharply over the next five days. A burst of relative strength in the Semis reversed the weakness and gave a burst of strength to the Nasdaq for about two weeks following February 24. On March 7, the index closed above resistance of its 50-day moving average for the first time in two months, a positive signal that should have led to consolidation and higher prices several days later. Instead, the Nasdaq failed to hold above not only its 50-day MA, but also fell below its 20-day MA two days later. The early weakness in yesterday’s session with the subsequent reversal in the afternoon caused a bullish “hammer” candlestick formation, although the index now must contend with resistance of both its 20 and 50-day moving averages, as well as the overhead supply created by the selling of the past several days.

A big reason for the Nasdaq’s choppy action has been the indecision in the Semiconductor Index ($SOX), which began as soon as the index first tested resistance of its 200-week moving average. Three weeks ago, the $SOX first touched resistance of its 200-week MA and closed below it. The following week, it closed just above the 200-week MA, but promptly fell to close last week below it. Yesterday’s gain put the $SOX back above its 200-week MA, which is currently just below the 440 level. If the $SOX closes flat or higher today, the index will have once again closed above that 200-week MA. While this would be positive, it would be much better to see a weekly close above the 449 level, which is the intraweek high of last week. Further, a weekly close above the prior high of 453 (from December 2004) would definitely confirm a breakout above the 200-week MA. Sooner or later, the indecision in the $SOX is going to resolve itself in one direction or the other. The fact that the $SOX continues to consolidate in the area of its 200-week MA rather than retracing significantly is bullish. Action among individual semiconductor stocks also causes us to believe the direction will be up, which is why we remain long a half position of SMH (Semiconductor HOLDR). Below is an updated look at the weekly chart of the $SOX. We have circled the key areas of resistance that, if broken, would signify a long-term trend reversal in the semis:

Why are we paying so much attention to the 200-week MA? Because that level has firmly acted as resistance in the Semiconductor Index for a full three years. As the $SOX goes, the Nasdaq usually follows, so a confirmed breakout over the 200-week MA is likely to result in a strong Nasdaq rally.

After the close yesterday, Intel reported its mid-quarter update, which received a rather positive reaction in the after-hours market. Intel raised their quarterly revenue guidance, which caused its stock, along with many other semiconductors, to trade higher in after-hours trading. Perhaps that news will be the impetus that will push the $SOX higher out of consolidation and firmly above its 200-week MA today. The one caveat is that the S&P and Dow will need to rally back above their prior breakout levels from last Friday, which they broke below two days ago. But strength in the $SOX could pull the S&P and Dow along with it.

Today’s watch list:

QQQQ – Nasdaq 100 Index Tracking Stock
Long

Trigger = 8 cents above 20-minute high
Target = 39.95 (just below high of January)
Stop = 37.04 (below yesterday’s low)

Notes = Yesterday morning’s selloff stopped us out of QQQQ, but we still like the setup and continue to believe the Nasdaq will breakout very soon. Odds are good that yesterday morning’s weakness was the final shakeout before the Nasdaq surges through and holds above its 50-day MA. You can never be afraid to re-enter a trade you stopped out of, even at a higher price, IF the setup is still valid. In this case, the setup is still valid because QQQQ remains only pennies from its 50-day MA. Our most profitable trades are often those that we stopped out of and immediately re-entered the following day because the chart still looked good.

Because QQQQ is poised to gap up above yesterday’s high, we are using the MTG Opening Gap Rules to determine our entry price. This means we will only buy QQQQ today IF it trades at least 8 cents above its high of the first 20 minutes of trading. If, however, QQQQ gaps higher and never rallies above its high of the first 20 minutes, we will not buy it yet.

Adding to SMH position. . .

In addition to the QQQQ setup, we are looking to add to our long position in SMH (currently only half position size). If SMH trades above 35.04, we will buy a HALF position, which will once again give us a full position of SMH. If this happens, our new average price in SMH would be approximately 33.80. Our new stop on the full position of SMH will be 33.80. Remember also that we already sold our first half position of SMH for a multi-point gain.

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 = ($336)

Open Positions:

unrealized P/L = + $275

PPH long (from Feb. 22) –
bought 72.19, stop 71.85, target 76.75, unrealized points = + 0.79, unrealized P/L = + $79

Notes:

QQQQ hit our stop yesterday, but we are looking to re-enter today, as well as adding to SMH (see trade setups above). Also note the new stop on SMH.

Edited by Deron Wagner,
MTG Founder and
President