The Wagner Daily | March 22, 2005

Commentary:

The broad market continued its recent pattern of indecision as the major indices oscillated in both directions yesterday, but failed to show any real direction into the close. The Nasdaq Composite closed unchanged, but the S&P 500 and Dow Jones Industrial Average lost 0.5% and 0.6% respectively. So much for follow-through from the previous day’s buying interest into the close. The one positive of yesterday’s session was that total market volume declined by 38% in the NYSE, while volume in the Nasdaq came in 25% lighter than the previous day. The drop in volume prevented the day from becoming yet another day of institutional selling (aka “distribution day”). The most likely reason for the steep drop in volume is that institutions were attempting to remain on the sidelines ahead of today’s FOMC meeting in which any change in interest rates will be announced at 2:15 pm EST.

In yesterday’s newsletter, we discussed how support of the 200-day MA was likely going to prevent the Nasdaq from falling very far in the short-term. Interestingly, the 200-day MA subsequently acted perfectly as support in yesterday’s session. Notice how the Nasdaq recovered to close 0.7% off its intraday low after testing its 200-day MA yesterday:

The S&P 500 set its lowest closing price since January 31, but is clinging to support of its prior low from February 22 (as illustrated by the horizontal blue line). Unfortunately, there is not much of a support level there and, more importantly, there is a lot of overhead supply even if the S&P attempts to rally. The index first will need to contend with resistance of its 50-day MA, which it has been trading below for the past four days. Above that, notice resistance of its prior uptrend line from the October low (the ascending red line below):

The Dow Jones Industrial Average has a similar looking daily chart as the S&P, except that its prior low has already been violated by a greater degree. The same resistance of the 50-day MA and prior uptrend lines are present on the Dow:

As we have been preaching for more than the past week, we continue to recommend caution against aggressively trading on either side of the markets right now. A clear trend will soon present itself, but the 200-day MA support of the Nasdaq is bound to complicate the bearish picture of the S&P and Dow. Remember that indices trading out of sync with each other are not the kind of markets that are ideal for trading the broad-based ETFs. Furthermore, remember the Feds will announce their decision on the Federal Funds Rate at 2:15 pm EST today, so expect volume to be light ahead of that news. Beware getting chopped up in the volatility that typically prevails in the afternoon trading sessions of Fed days.

Today’s watch list:

SMH – Semiconductor HOLDR
Long

Trigger = above 32.87 (above yesterday’s high and the 200-day MA)
Target = 34.75 (just below its prior high of the recent correction)
Stop = 32.10 (below yesterday’s close and the MA convergence)

Notes = As we have been discussing for the past three days, the $SOX is hanging around support of its 200-day MA, which has also converged with the 50-day MA. As such, we now have a low risk entry point on SMH long. If it holds the current lows, we will be long at a good price, but we can quickly exit with a minimal loss if it doesn’t. The idea of this trade is to take profits quickly and either be “right or right out.” We don’t intend to play much more than a bounce in this index UNLESS the entire broad market suddenly reverses. If it triggers, we will assess the market carefully and trail a stop as appropriate.

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:

Notice we have moved to a split stop on IWM, which closed flat yesterday.

Edited by Deron Wagner,
MTG Founder and
President