The Wagner Daily | April 21, 2005

Commentary:

Sparked by excitement over Intel’s earnings report the previous evening, the Nasdaq began yesterday with an opening gap higher, but the sellers immediately took control and caused the index to trend lower throughout the day. By day’s end, the Nasdaq’s 0.6% opening gain had turned into a 1.0% loss. Both the S&P 500 and Dow Jones Industrial Average followed a similar intraday pattern and closed lower by 1.3% and 1.1% respectively. Tuesday night’s enthusiasm in the Semiconductor Index also faded quickly, as the $SOX closed 2.2% lower yesterday. Total market volume in the NYSE rose by 5%, while the Nasdaq volume increased by 11% over the previous day’s level. This means that yesterday, like the last three “down days” in the S&P, was another bearish “distribution day.” Of the last six days, the S&P has closed lower four times, each of those days on higher volume than the previous day. Of the two “up” days, volume declined both times. This type of relationship between price and volume is bearish and typical of downtrending markets.

As anticipated, the 200-day moving average acted perfectly as resistance on the S&P 500 yesterday. After selling off sharply on heavy volume towards the end of last week, the S&P retraced modestly on April 18 and 19, but on lighter volume. As such, Tuesday’s close at the 200-day moving average became a prime target for the bears to sell short yesterday morning. The subsequent result was that the S&P closed below last week’s low and at a new low for 2005. The Dow Jones Industrials did the same, closing only a few points above the 10,000 level. The daily chart of the S&P 500 below illustrates how the 200-day MA acted as a clear resistance level to trigger a bearish reversal yesterday morning:

Because the S&P 500 broke below its 20-minute low, we are now short SPY (S&P 500 Index Tracking Stock). Based on yesterday’s closing price, the SPY short is showing an unrealized gain of nearly one point. In addition, our hedge fund also remains short several stocks within the U.S. Home Construction Index ($DJUSHB), which fell another 2.5% yesterday. We’ve been holding short positions in that sector for over a month and the index is really starting to weaken now and has an abundance of overhead supply from March’s consolidation above.

Nearly every technical signal we follow now points to more favorable odds on the short rather than long side of the market. However, if you have a non-marginable trading account and are therefore looking for a long position, consider re-entering BBH (Biotech HOLDR), which we sold for a 10-point gain last Friday. Since its large gap and rally on April 15, BBH has been consolidating nicely in the upper end of its range. Yesterday’s close of 154.69 puts BBH only one point away from trading above the intraday high of April 15 (it is already above that day’s closing price). A close above yesterday’s high would also cause BBH to close at a new 52-week high, which would be impressive considering the current market environment. The weekly chart of BBH already shows a new 4-year weekly closing high last week. The red horizontal line on the daily chart below illustrates the breakout point we are watching for:

Remember that corporate earnings season is in full swing. eBAY and Motorola reported earnings last night and a slew of companies report today, both before and after the close (see the Yahoo! Finance earnings calendar for a complete list). Although earnings season often results in large overnight gaps in both directions, the chart patterns typically prevail. Nevertheless, take it easy with the quantity of open positions you are holding until earnings season has passed. Most importantly, beware of holding companies through their scheduled earnings announcement dates.

Today’s watch list:

We are stalking BBH for a new long entry if it breaks out, but we would rather assess overall market conditions before calling it an “official” long entry. Advanced traders may consider BBH on their own. In the interim, we remain long PPH and are now short SPY as well.

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 = + $184

PPH long (from April 7) –
bought 72.80, stop 72.90, target 77.60, unrealized points = + 0.96, unrealized P/L = + $96

Notes:

SPY short triggered yesterday and we have lowered the stop.

Edited by Deron Wagner,
MTG Founder and
President