The Wagner Daily | March 17, 2005

Commentary:

The broad market suffered its second consecutive day of institutional selling, as each of the major indices registered significant losses on higher volume. A profit warning from General Motors was largely responsible for the 1.0% drop in the Dow Jones Industrial Average, but the Nasdaq Composite also lost 0.9% yesterday. The S&P 500 Index dropped 0.8%. Like the previous day, each of the major indices trended steadily lower throughout the day and closed at their worst levels of the session. An opening bounce in the semiconductors initially enabled the Nasdaq to show strength, but it quickly faded and reversed the direction of its trends after the first hour of trading.

Total market volume in the NYSE increased by 9%, while volume in the Nasdaq came in 8% higher than the previous day. Because each of the major indices closed lower and on higher volume, yesterday counted as yet another bearish “distribution day.” Within the past four weeks, there have been seven “distribution days” in the NYSE and four in the Nasdaq. More interesting is the fact that four of those seven days of institutional selling in the NYSE have occurred within the past two weeks. The high concentration of “distribution days” is similar to what we saw in the beginning of January, which preceded the large selloff that lasted the entire month.

While the price action of the past two days may not make the bulls happy, we view it as positive because it appears we may be shifting from a rangebound, trendless market to a downtrending one. Rather than meandering up and down within a range, the past two days have consisted of a rather smooth downtrend. The higher volume of the past two days, an earmark of institutional selling, helped the major indices maintain their downtrends rather than whipping around. Remember that short-term traders have the ability to profit on either side of the market through buying the strong sectors or shorting the weak ones, but the most difficult type of market to profit in is one that chops sideways. Based on the daily chart patterns that are forming, it’s beginning to look like we may be entering a short to intermediate-term downtrend in the broad market, which certainly beats a sideways market.

Going into yesterday morning, we were considering a short in SPY (S&P 500 Tracking Stock) due to a break of its daily uptrend line that began with the October 2004 low. However, we were hesistant to short it because the S&P was still holding above its 50-day moving average. Yesterday’s selloff changed that, as the S&P 500 Index is now firmly below its 50-day moving average, and now has additional overhead of its uptrend line as well. The daily chart of the S&P 500 Index below illustrates the break of the 50-day MA and the new resistance of its prior uptrend line:

Yesterday’s one percent loss in the Dow Jones also caused that index to close firmly below its 50-day moving average as well:

Tuesday’s selloff caused the S&P 500 to lose support of its uptrend line that had been in place for five months, while yesterday’s selloff caused the S&P to lose support of its 50-day MA. In the Dow, yesterday’s losses caused that index to break below both its corresponding five-month uptrend line and its 50-day MA as well. Furthermore, these breaks of support over the past two days occurred on strong volume, which confirms the legitimacy of the breakdown. Most importantly, remember that prior support levels become the new resistance levels after the support is broken. Therefore, if you are still holding long positions that are showing losses, you may want to consider viewing any bounce in the broad market as an opportunity to dump your losing long positions. We also view any decent retracement in the broad market as a chance to initiate new short positions, as it seems the prior sideways action is quickly becoming a downtrending trend (at least in the short-term).

Before you get too aggressive with new short positions, there is one important fact to consider — the Semiconductor Index ($SOX) has now dropped to major support of its 200-day moving average. The 200-day MA was a major area of resistance until the $SOX rallied above it more than a month ago, which means the 200-day MA should equally be a strong support level now. The 50-day MA has also converged with the 200-day MA, which should further act as support. Take a look:

As the $SOX is not likely to easily break below that 50 and 200-day MA convergence of support, we feel your best bet is for shorting sectors and stocks that are not technology-related. In other words, focus on the shorting the Dow and S&P type sectors rather than the Nasdaq ones. It’s quite possible the Nasdaq will attempt to find support and perhaps even rally, but the S&P and Dow could continue to drift lower. Advanced traders may even wish to buy SMH (Semiconductor HOLDR) due to the major area of support on the $SOX here, but be sure to honor a tight stop if you do.

Today’s watch list:

There are no new “official” trade setups for today, although we are now short IWM (per intraday e-mail alert to subscribers yesterday). Advanced traders may wish to consider buying SMH here (with a tight stop), but it is not an “official” trade setup because it is higher risk.

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 = + $61

Notes:

Per intraday e-mail alert, we shorted IWM yesterday.

Edited by Deron Wagner,
MTG Founder and
President