The Wagner Daily | April 5, 2005

Commentary:

The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite each spent the first half of yesterday in negative territory, but a modest rally during the final two hours of the session caused each of the major indices to close slightly higher. Both the S&P 500 and Nasdaq Composite gained 0.3%, while the Dow Jones Industrials closed 0.2% higher. Given the amount of overhead supply created from the bearish price action of the previous day, yesterday’s late afternoon rally was a bit surprising, but overall volume once again failed to confirm the gains. Other market internals were showing a mixed picture as well.

Total volume in the NYSE declined by 6% yesterday and volume in the Nasdaq came in 15% lighter than the previous day. Despite yesterday’s late-day reversal and percentage gains, the broad market once again failed to register a day of institutional accumulation, as would be confirmed by an increase in volume on a day of gains. Interestingly, total volume in the Nasdaq has come in below its 50-day average level in each of its past eleven “up” days. It has been approximately one month since either the NYSE or Nasdaq has had a day of solid gains on higher volume (“accumulation”). However, a vast majority of the “down” days within the past month have occurred on higher volume than the previous day (“distribution”).

During yesterday morning’s weakness, the Dow Jones traded just below its January low and its 200-day moving average, but the late afternoon recovery caused the index to close above the previous day’s low. The daily chart of the Dow is now clearly showing a major area of support on the Dow due to convergence of its 200-day moving average and its prior low from January. If the index holds this level, it could provide us with a low-risk entry on the long side of DIA (Dow Jones Tracking Stock), but we would only consider buying if we see at least one or two “accumulation days” that are necessary in order to confirm a potential reversal. Conversely, a closing price below yesterday’s low would be equally bearish and would provide a low-risk short entry in DIA due to a break of both its January low and its 200-day MA. The daily chart of the Dow below illustrates the “make it or break it” level at which the Dow closed. The horizontal orange line marks the January low:

While the bounce off the 200-day MA and January low is positive, notice the amount of overhead resistance that was created from the weakness of the prior two days. Only a surge in volume would provide the power necessary to push the Dow back above those highs, which is why we are inclined to step aside and watch this play out rather than attempting to buy the Dow at this level.

As for the S&P and Nasdaq, both of those indices appear to be in “no-man’s land” in the short-term. Both indices are roughly in the middle of their trading ranges of the past week and could easily go in either direction. Worse, they may continue to trade in an indecisive and choppy sideways fashion. The Nasdaq is also clinging to its 200-day MA like a magnet, making it difficult for the index to establish a trend. The 60-minute chart of SPY (S&P 500 Tracking Stock) illustrates how indecisive the broad market has been over the past week:

The chart above sums up why we inclined to wait on the sidelines in cash rather than attempting to buy or sell short SPY or QQQQ right now. Odds are good that attempting to predict the direction of the broad market’s next move would only result in getting “chopped up” and loss of capital. When a variety of factors favor the profitability of a trade in either direction, that is the time to get aggressive with new trade entries. But the current tug-of-war at the broad market’s pivotal levels is not a game we are interested in playing.

Throughout the past several days, we received several e-mails from subscribers who were each seeking our insight on the same topic; What is the best way to trade the current market conditions? The overall tone of their e-mails was similar in that a majority of their positions, whether long or short, have been consistently getting stopped out over the past week. The individual loss of each trade was controlled due to a disciplined adherence to stop placement, but the net effect has been a slow grind of losses to their trading accounts. Understandably, they were seeking a little comfort and perhaps a new idea they have not yet thought about. So, what are the words of wisdom that Morpheus Trading Group has to offer these aspiring traders? It’s extremely simple – If you can’t find your groove and are losing money right now, simply DON’T TRADE! It’s amazing how many traders feel the need to be in the markets at all times!

Remember that your greatest benefit as a retail trader is the ability to switch to a cash position and sit on the sidelines when market conditions are not in your favor. Then, when a steady trend develops and the indecision goes away, you can be ready to strike on the right side of the market at a moment’s notice. This strategy of sitting in cash when the market is difficult will allow you to preserve capital during challenging market conditions, but allow you to profit when the time is right. Traders who think they always need to be in the markets are the ones who generally dig themselves into a hole during tricky market conditions, only to come back to break even when conditions improve. The decision is yours, but we feel it is much smarter to breakeven during challenging times so that you can quickly turn a net profit when times are good. The Morpheus Capital hedge fund has shifted to a mostly cash position right now and you might consider doing the same. Remember the most patient traders are always rewarded over the long-term.

Today’s watch list:

There are no new plays for today (see commentary about this above).

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 = ($32)

Notes:

No changes today.

Edited by Deron Wagner,
MTG Founder and
President