The Wagner Daily | April 29, 2005

Commentary:

Although yesterday’s session was choppy, the major indices gapped down, trended lower all day, and closed at their intraday lows. The 1.4% loss in the Nasdaq Composite caused the index to break below its April low and close at its lowest level since October 14. The S&P 500 and Dow Jones Industrials lost 1.1% and 1.3% respectively, but both indices closed above their April lows.

Total market volume in the NYSE increased by 4%, while volume in the Nasdaq came in 5% higher than the previous day. Bearish market internals also confirmed the “distribution day,” as declining volume outpaced advancing volume by a margin of more than 4 to 1 in both the NYSE and Nasdaq. Of the past three sessions, there have been two days of higher volume losses (“distribution”) and one day of higher volume gains (“accumulation”). The Nasdaq, however, has suffered a total of five “distribution days” within the past eleven sessions.

In the April 26 issue of The Wagner Daily, we discussed the probability of the major indices setting new lows of the year during the subsequent days. The broad market bounced the next day, but yesterday’s losses wiped out all of the previous day’s gains and then some. Though still within the trading range of the past several weeks, both the S&P 500 and Dow Jones Industrial Average are now within the lower third of their respective ranges. The Nasdaq Composite, however, actually broke down to close at a new low of the year. The daily chart below illustrates this:

In addition to the Nasdaq, the Russell 2000 Small Cap Index (tracked by IWM) also broke down to a new low of the year and set its lowest closing price since October 22. Notice how the 200-day moving average acted perfectly as the resistance that caused IWM to roll over to set new lows:

The reason we mention the Russell 2000 Small Cap Index is because of its significance in determining market cycles. When entering a new bull market, small-cap stocks, typically considered higher risk growth-oriented companies, usually outperform the major indices. Conversely, small-cap stocks usually lead the way lower when a market is at or near a top. We therefore find it interesting to note that the small caps have set new lows ahead of the S&P and Dow. This could be considered one more barometer of the market’s health.

The broad market has been choppy and indecisive on a day-to-day basis, but the bottom line is that the trend clearly remains down. All of the major indices are now below their 200-day moving averages and have headed lower after testing their respective resistance levels. Until the broad market proves otherwise, it’s best to remain positioned primarily on the short side of the market. When ninety percent of breakouts are failing, it doesn’t make sense to aggressively enter long positions when you can simply enter short positions and have greater odds of profitability. Don’t fight the trend; embrace it and you will reduce your frustration and realize profits.

Today’s watch list:

As we now have three open positions (DIA and SPY short, PPH long), there are no new trade setups for today.

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 = + $288

SPY short (from April 20) –
short 114.72, stop 117.25, target 109.20, unrealized points = + 0.52, unrealized P/L = + $104

PPH long (from April 7) –
bought 72.80, stop 72.90, target 77.60, unrealized points = + 0.95, unrealized P/L = + $95

Notes:

Note the new split stop on DIA. Everything else remains the same.

Edited by Deron Wagner,
MTG Founder and
President