The Wagner Daily | April 15, 2005

Commentary:

The broad market sustained a serious technical blow yesterday when the major indices followed up the previous day’s selling with another day of high volume distribution. The Nasdaq Composite slid another 1.4%, the Dow Jones Industrials dropped 1.2%, and the S&P 500 lost 1.0%. Total market volume in the NYSE surged 17% higher, while volume in the Nasdaq came in 10% higher than the previous day’s level. It was the second consecutive “distribution day” in the S&P and very bearish market internals confirmed the weakness. Declining volume, for example, outpaced advancing volume by a margin of approximately 5:1 in both exchanges. The higher volume selling, combined with very bearish internals, left no doubt to the fact that institutions were heavily selling yesterday.

More important than yesterday’s percentage losses is that each of the major indices closed at new lows for 2005 and also broke below pivotal areas of price support on their charts. After two failed reversal attempts within the past two weeks, the Dow Jones Industrial Average broke down and closed firmly below its 200-day moving average. Yesterday’s close of 10,278 was the lowest closing price since November 3, 2004, which was also the last time the index closed below its 200-day MA. The daily chart of the Dow below illustrates the break of support:

Because the 200-day MA was formerly support on the Dow, it will now act as the new resistance level. The prior low of January (10,368) will also act as major resistance. Any rally attempt into the 200-day MA or prior January low will likely be met with sellers, as yesterday’s breakdown created an abundance of overhead supply. Therefore, we view any rally in the Dow as a low-risk entry point to enter a new short position in DIA (Dow Jones Industrials Tracking Stock). We feel there is a good risk/reward to shorting the Dow because the next major area of support is all the way down at the October 2004 low of 9,700.

Looking at the Nasdaq Composite, it is positive to see the index is finally moving away from its 200-day MA, which has been acting like a magnet and causing major indecision and volatility for the past three weeks. Even though the trend is down instead of up, it will be much easier to profit from Nasdaq stocks and ETFs if a downtrend replaces the choppy mess that has been plaguing the Nasdaq. Yesterday’s close of 1,946 is the lowest since October 26, 2004. Like the Dow, expect the 200-day MA to now act as a solid area of resistance on any rally attempts. We now expect the Nasdaq to fall to its next area of support, which is the October 2004 low around the 1,900 level. Between the Dow and Nasdaq, a new short position in DIA probably offers a better risk/reward ratio than shorting QQQQ (Nasdaq 100 Tracking Stock). The blue horizontal line on the chart below illustrates the Nasdaq’s next area of price support:

The S&P 500 Index also closed at a new low for 2005, but only by one point. However, it is now poised to break a major area of support on its weekly chart. As you may recall, the January low coincided with support of the prior high from early 2004 at the 1,163 area. The significance of this support level was proven again in March when the S&P bounced off the same level. If the S&P breaks firmly below the 1,163 area, it will represent a major trend reversal that will likely set a bearish trend for the remainder of the year. Because both the Nasdaq and Dow have already broken down below their 200-day MAs, it seems likely that the S&P will follow suit. The horizontal red line illustrates this pivotal area of support/resistance on the weekly chart below. Any further weakness in the index will cause a break of support:

Although not shown on the weekly chart above, the 200-day moving average of the S&P 500 lies at 1,153. Keep an eye on that level over the next few days.

On a different note, the U.S. Home Construction Index finally broke a major area of support yesterday. After several failed attempts to rally back above its 50-day moving average within the past two weeks, the $DJUSHB index is now rolling over. We have been anticipating this weakness for several weeks and it has required a lot of patience, but the Morpheus Capital hedge fund remains short several home construction stocks and we hope our subscribers remain short as well. The daily chart of $DJUSHB below shows how the index finally broke down below the consolidation of its March lows:

We intend to remain patient with our short positions in the Home Construction sector (RYL, LEN, HOV) because we expect the $DJUSHB index to sell-off down to support of its 200-day MA, presently at the 715 area. Remaining short through such a downward move would equate to a profit of approximately 15% in most of the home construction stocks. There is not an ETF that tracks the index, but some leading stocks to consider shorting are: RYL, HOV, LEN, PHM, KBH, BZH, TOL, and DHI.

One positive about yesterday’s session is that it was the second consecutive day of a steady trend, albeit a downtrend. Given the indecision and choppy action the broad market has been experiencing lately, two days of a trend in the same direction is nice to see. If you are trading based on technical analysis and without opinions, the direction of a trend should not matter to you. Swing traders only need a trend to generate profits; the direction of the trend does not matter. Based on a break of the key technical levels we discussed, it appears the broad market may be concluding the recent indecision and entering into a new downtrend. As such, we will be looking to enter new short positions in the broad market on any subsequent bounces into resistance. As of now, we are positioned on the long side of the market, but only in the Drug and Biotech sectors, both of which are trending inversely to the broad market because institutions are moving money into more “defensive” sectors.

Today’s watch list:

We are watching for a proper short entry point in both DIA and SPY, but would like to first see a small bounce into resistance as opposed to shorting the breakdown. At the least, a sideways consolidation would be okay too. Rather than listing specific entry prices here, we will send an e-mail alert to Wagner Daily subscribers if/when we enter DIA and/or SPY short. For now, we remain long BBH and PPH, both of which are showing 2-point unrealized gains.

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 = + $205

PPH long (from April 7) –
bought 72.80, stop 72.40, target 77.60, unrealized points = + 2.00, unrealized P/L = + $200

Notes:

No changes to our open positions.

Edited by Deron Wagner,
MTG Founder and
President