The Wagner Daily | April 12, 2005

Commentary:

Yesterday was rather uneventful, as the S&P 500 spent the entire day oscillating in a narrow range of only five points and closed the day unchanged. The Dow Jones Industrial Average lost a marginal 0.1%, but the Nasdaq Composite showed relative weakness and closed 0.4% lower. A thoroughly mixed performance of the major industry sectors confirmed the indecision in the broad-based S&P. The best performing primary sectors were Utilities ($DJU) and Oil ($XOI), but both indices gained only 1%. The worst performers were the Internets ($GIN) and Semiconductors ($SOX), but even those sectors only lost 1.2% and 0.8% respectively. No sectors really stood apart from the crowd and most, like the S&P 500, closed near the flat line.

Although the Nasdaq lost 0.4% yesterday, total volume in that exchange declined by 9%, which made yesterday the lowest volume day of the year. As such, we would not place too much emphasis on the Nasdaq’s loss because the light volume level indicated a lack of buyers rather than an abundance of sellers. When this occurs, it only takes one day of marginal buying interest to completely reverse the light volume losses. This is the reason MTG typically only shorts indices, sectors, and stocks that are selling off on higher than average volume. Like yesterday’s performance in the S&P, total market volume in the NYSE was unchanged from the prior day’s level. Breadth, however, was negative because decliners outpaced advancers by a margin of 9:7.

Taking an updated look at the daily chart of the S&P 500, you will notice that yesterday’s sleepy action resulted in the formation of a “doji star” candlestick pattern, which is usually a sign of indecision. In the short-term, the index is now trapped between support of its March low and resistance of its 50-day moving average overhead. A breakout above the 50-day MA would probably generate some follow-through momentum to the upside that would make it easier to profit on the long side of the market. Conversely, a break below the March low would be quite bearish, as it would represent a breakdown of a double bottom, as well as a break below the prior highs from early 2004. But until either one of those scenarios occur, it will remain challenging to profit from trading the broad market because there is no clear trend. On the chart below, we have circled these support and resistance levels that would move the S&P out of its choppy trading range:

The Dow chart is weaker than the S&P, as it is further below resistance of its 50-day MA and is more in danger of breaking below its 200-day MA. On April 4, the Dow bounced off support of its 200-day MA and subsequently rallied for the next three days, but it ran out of gas when it tested resistance of its April 1 high. The index is now drifting back down and is only 68 points above its 200-day MA. Because of its close proximity to the 200-day MA, we recommend you set an alert on your trading software to notify you if the Dow breaks below it. A confirmed close below the 200-day MA within the next few days, especially on higher volume, would likely act as a major drag on the S&P and Nasdaq as well:

In the Nasdaq Composite, it has been the same technical picture for three weeks. Simply put, the Nasdaq remains super-glued to its 200-day moving average. Buyers promptly stepped in after several separate closes below it, while the sellers took control after each breakout attempt. Yesterday’s closing price of 1,992 was right on the 200-day MA. Needless to say, watch for a big move in either direction away from the 200-day MA. The longer the Nasdaq hangs near its 200-day MA, the more powerful the move will be when it eventually comes (and it will). Take a look:

Remember that this week kicks off quarterly corporate earnings season. Former Internet leader Travelzoo reports before today’s open, while Apple Computer and Advanced Micro report tomorrow. Be careful entering any new positions in stocks that are reporting in the next few days, as major volatility is likely to follow their reports, especially considering the current “make it or break it” point of the broad market. For a free calendar of earnings dates, check out this section of the Yahoo! Finance web site.

Today’s watch list:

There are no new trade setups for today, as we now have three open positions with PPH long, BBH long, and IWM short.

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 = + $109

PPH long (from April 7) –
bought 72.80, stop 71.80, target 77.60, unrealized points = + 0.40, unrealized P/L = + $40

BBH long (from April 7) –
bought 145.15, new stop 142.70, target 151.50, unrealized points = (1.70), unrealized P/L = ($170)

Notes:

We have tightened the IWM stop again and also lowered the BBH stop slightly, as per yesterday’s intraday e-mail alert. In the event of an opening gap down to the stop price in BBH, remember to use the MTG Opening Gap Rules to adjust the stop and manage the position.

Edited by Deron Wagner,
MTG Founder and
President