The Wagner Daily | April 4, 2005

Commentary:

The broad market returned to its bearish pattern of the past two weeks, as the major indices began the day on a positive note but ended on a rather negative one. The S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite each began the day with an opening gap above their highs of the previous day, but traders immediately sold into the strength, setting in motion a downtrend that lasted throughout the remainder of the day. By the end of the session, each of the major indices had closed below their respective lows of the previous day. Blue chips showed the most relative weakness, as the Dow Jones Industrials lost 0.9% and closed at its lowest level of the week. The S&P 500 gave back more than half its gains from the March 30 rally when it lost 0.6% on Friday. The Nasdaq Composite similarly shed 0.7% and also posted its fourth consecutive week of losses.

Not surprisingly, the broad market continued to maintain its recent pattern of higher volume on the “down” days. Total volume in the Nasdaq rose by 5%, while volume in the NYSE increased by 1% over the previous day’s level. Because each of the major indices closed lower, but on higher volume, this means the broad market experienced another bearish “distribution day.” It has been nearly one month since the Nasdaq has registered a solid day of gains on higher volume (“accumulation”), but nearly every “down” day has seen institutional selling. Other market internals also confirmed Friday’s bearish action, as down volume easily outpaced up volume in both exchanges. Decliners also outnumbered advancers.

Looking at the daily charts of the major indices, you will notice that each of them formed “bearish engulfing” candlestick patterns due to last Friday’s action. This type of formation occurs when an index gaps open above its high of the previous day, but closes below its low of the previous day. This type of candlestick pattern is bearish because it traps the bulls who bought the opening gap up in anticipation of a follow-through rally, but were promptly left “holding the bag” when the market reversed instead. This typically leads to lower prices over the next several days, as the bulls are forced to close their long positions while the pattern simultaneously attracts new short sellers. As such, we would not be surprised to see a break of last week’s lows in the coming days. Below, we have circled the “bearish engulfing” candlestick pattern on the daily chart of SPY (S&P 500 Index Tracking Stock):

As we discussed extensively throughout last week, the prior lows of January remain an important area of price support on the major indices. Last Wednesday’s rally initially looked good from a technical view because it appeared each of the major indices were going to form double bottoms at their prior lows from January. However, Friday’s vicious selloff caused the Dow Jones to actually break below Wednesday’s low. The S&P 500 and Nasdaq Composite retraced approximately two-thirds of that day’s gains. The Dow is therefore going to have a lot of overhead resistance to contend with if it even attempts to rally from here, which doesn’t seem very likely. The S&P and Nasdaq similarly have retraced too far to consider last Wednesday’s rally intact. Therefore, we feel the S&P and Dow are now in danger of violating their January lows in the coming days (the Nasdaq already is below its January low). If this happens, it should create a wave of rapid selling from which short sellers can profit, but it will not be good for any long positions you may have. So keep those stops very tight on any long positions and be ready to hit the sell short button if the S&P and Dow begin violating their January lows. We stopped out of MDY early last Friday morning, but promptly shorted IWM when the market reversed. We will probably initiate new short positions if the S&P and Dow fall to new lows. The pivotal January lows are as follows: S&P 500 – 1,163, Dow Jones – 10,368. We suggest you write those numbers down and set alerts on your trading platform so you are quickly alerted if the indices break down.

Today’s watch list:

We shorted IWM last Friday (per intraday e-mail alert). We will consider shorting SPY or DIA if those indices break their January lows, but we want to be sure the market internals confirm before shorting them.

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 = ($101)

Open Positions:

unrealized P/L = + $15

Notes:

MDY hit our stop Friday morning, but we shorted IWM thereafter (per intraday e-mail alert).

Edited by Deron Wagner,
MTG Founder and
President