The Wagner Daily | April 14, 2005

Commentary:

Despite Tuesday’s bullish “accumulation day,” the major indices completely reversed the prior day’s gains and closed at their intraday lows. Rather than consolidating and absorbing the prior day’s gains, the broad market gapped down on the open and trended lower throughout the entire day. The S&P 500 and Dow Jones Industrials, both of which gained 0.6% the previous day, closed lower by 1.2% and 1% respectively. The Nasdaq Composite ignored Tuesday’s 0.7% gain and lost 1.5% yesterday. All three of the major indices closed near their intraday lows of the prior day’s session. The intraday chart of the S&P 500 below illustrates the incredible volatility and indecisiveness the major indices have experienced during the past two days:

As you may recall, the S&P and Dow both showed institutional accumulation the previous day because the indices closed higher and on a 29% increase in NYSE volume. However, yesterday’s total market volume in the NYSE increased 3% more, making it a bearish “distribution day.” Volume in the Nasdaq declined by 10%, but this was not too encouraging given that the index slid 1.5% yesterday. Tuesday was the first institutional “accumulation day” the Nasdaq had registered since March 7, so a sideways day of consolidation would have been much more likely than a complete reversal of gains and then some. The 40% surge in Nasdaq volume that accompanied Tuesday’s bullish intraday reversal gave traders a glimmer of hope that the index may finally begin an uptrend off support of its 200-day MA, but yesterday’s loss caused the index to close below its 200-day MA and near the low of March. The Dow is also fell back down to close just above its 200-day MA, so watch for a potential break of that level.

Admittedly, we were quite surprised by yesterday’s nasty selloff. Tuesday’s strong intraday reversal had all the classic traits of a bullish reversal day that often marks a short-term bottom in the broad market. On that day, major indices drifted lower and took out stops below key pivot points, only to have volume surge and prices rapidly reverse to the upside. Turnover increased dramatically that day, meaning that volume also confirmed the reversal. This made it all the more unusual to see an aggressive day of institutional distribution the following day. Institutional activity seems to be engaged in a tug-of-war, as if there is great indecision as to the direction of the broad market’s next major move. Just when you think the major indices are finally going to establish some type of trend, they reverse course the next day. Trends have only been lasting a day or two, making it equally difficult to profit from both buying and shorting the broad-based ETFs. As such, your best odds of success lie in trading specific industry sectors that are showing relative strength or weakness to the broad market.

For long positions, consider the Pharmaceuticals (PPH), Biotechs (BBH), or Utilities (UTH), each of which have been showing major strength against the broad market. PPH, for example, completely ignored the broad market weakness and gained 1.5% yesterday. More importantly, it broke out above resistance of a 14-month downtrend line and closed at a new 7-month high. The weekly chart below illustrates this:

BBH has not confirmed a weekly breakout yet, but it is consolidating nicely above its 200-day MA. It appears that one more day of buying within the sector will push BBH to a new 4-month high:

As you know, we currently are long both BBH and PPH and are showing a solid unrealized gain in both ETFs. If interested, the Utilities sector ($DJU) also is holding at a new 52-week high and UTH and XLE are two ETFs that are associated with the index. As for shorts, the tech-related sectors such as Internets (HHH) and Semis (SMH) are underperforming the broad market, but it may be a little bit late to enter new short positions at this time.

In the “big picture,” it is bearish that Drugs and Utilities are showing the most strength and tech stocks are showing the most weakness. This type of sector rotation indicates institutions are moving money out of growth-oriented sectors and into the more defensive “safer” sectors such as Utilities and Drugs. This type of sector rotation has historically preceded major moves lower in the broad market, so it is something to think about. But as long as you focus on trading specific sectors instead of the broad market, you are less likely to get “chopped up” in the current tug of war that the major indices are experiencing.

Today’s watch list:

There are no new trade setups for today, but we remain long both PPH and BBH.

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 = + $255

PPH long (from April 7) –
bought 72.80, new stop 72.40, target 77.60, unrealized points = + 1.80, unrealized P/L = + $180

Notes:

We have raised the stop in PPH as per above.

Edited by Deron Wagner,
MTG Founder and
President