The Wagner Daily | March 21, 2005

Commentary:

The major indices once again spent the first half of the day trending lower last Friday, but this time the broad market saw mild buying interest into the close. Both the S&P 500 and Dow Jones Industrial Average closed within 0.1% of their previous day’s closing prices. The Nasdaq Composite showed relative weakness, but recovered from a 0.8% intraday loss to close only 0.4% lower.

Total market volume surged much higher last Friday, but that was partially attributed to “quadruple witching” options expiration, which typically results in a broad market volume spike on the third Friday of each month. Volume in the NYSE rocketed 48% higher, while total volume in the Nasdaq registered 24% higher than the previous day’s level. Volume in the NYSE was the highest of any day this year, but we can’t accurately jump to any useful conclusions because both the S&P and Dow closed flat. The Nasdaq, however, experienced another day of distribution, which has become rather common lately.

One factor that may cause this week’s trading action to be very tricky is the Nasdaq’s close proximity to its 200-day moving average, as annotated below:

Because the Nasdaq has been firmly trading above its 200-day moving average for the past five months, the 200-MA is likely to act as a major area of support if the Nasdaq drops any lower. If both the S&P and Dow were equally close to their respective 200-day moving averages, it would probably enable a substantial bounce in all the major indices. But the problem is that both the S&P and Dow have just begun to break support and are still well above their 200-day MAs. Further, both indices closed last week below prior support of their 50-day moving averages. Therefore, it appears we have a situation where the major indices are out of sync with each other.

When the S&P and Nasdaq charts begin to diverge and show opposite pictures, it typically results in choppy and volatile market action. We now have a scenario where the daily charts of both the S&P and Dow look bearish and are poised to head much lower, but the Nasdaq, which showed weakness ahead of the S&P and Dow, is coming into a major area of support. In addition, the Semiconductor Index ($SOX) is still clinging to support of its 200-day MA, which will probably help the Nasdaq to bounce as well. So, even if you short SPY or DIA, they may not drop very far due to support in the Nasdaq. Conversely, it’s probably not wise to aggressively buy the Nasdaq in anticipation of a strong retracement because the weakness in the S&P and Dow will most likely prevent the Nasdaq from rallying very far. This is why, as we mentioned nearly every day last week, we continue to feel that a mostly cash position is your best bet. There’s nothing wrong with selectively putting on a few trades in sectors that are either outperforming or underperforming the major indices, but it’s probably best to avoid trading SPY or QQQQ in the short-term. When the major indices return to trading in sync with each other, it will provide a much better risk/reward for trading the broad-based ETFs.

Today’s watch list:

There are no new “official” trade setups for today, although we remain short IWM. Advanced traders may wish to consider buying SMH here (with a tight stop), but it is not an “official” trade setup due to its 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 = + $115

Notes:

No change to the stop on IWM.

Edited by Deron Wagner,
MTG Founder and
President