The Wagner Daily | May 2, 2005

Commentary:

The broad market spent the first ninety minutes of Friday’s session following-through on the previous day’s weakness, but the major indices reversed in the afternoon and closed firmly higher. The Nasdaq Composite reversed an early 0.8% loss to close with a 0.9% gain. Both the S&P 500 and Dow Jones Industrial Average also trended lower in the morning, but rallied to close the day 1.2% higher. Total volume in the NYSE increased by 7%, while volume in the Nasdaq came in 10% higher. The higher volume combined with higher closing prices made Friday a bullish “accumulation day,” but two of the three prior sessions were conversely down days on higher volume (“distribution days”).

For the week, both the S&P 500 and Dow Jones Industrials eked out a 0.3% gain, but the Nasdaq Composite lost 0.5%. Like the prior week, the day to day action in the major indices resembled a roller coaster ride, which made it difficult for swing traders to profit from either buying or selling short stocks. Swing traders can realize a consistent profit when the market is either trending higher or lower, but the indecisive and choppy markets typically present a challenge. One likely explanation for the broad market’s recent indecision is the S&P 500’s close proximity to its 200-day moving average.

After the Nasdaq Composite initially sold off down to support of its 200-day moving average on March 21, the 200-MA acted like a magnet for three subsequent weeks, causing the Nasdaq to become very whippy. When the Nasdaq finally closed firmly below its 200-MA on April 13, it resulted in a sharp move lower for the next several days. Below is a daily chart of the Nasdaq that illustrates how the index was very choppy when it was near its 200-day MA, but moved firmly lower when it finally broke down:

Unfortunately, the S&P 500 is now acting like the Nasdaq did during that three week period from mid-March to mid-April because it too has sold off down to its 200-day moving average. The S&P 500 will eventually break away from its 200-day MA in one direction or the other, but we expect indecisive day to day action until that happens. Notice how the daily chart of the S&P looks similar to the Nasdaq’s daily chart after the index fell down to its 200-day MA:

The big question, of course, is which direction the S&P will go when it breaks away from the magnetic field of its 200-day MA. Obviously, nobody knows for certain, but the charts are showing more reasons it will go lower before going higher. Specifically, the 1,163 price level continues to present a significant area of resistance. As you may recall, 1,163 correlates to the prior lows of 2005, which the S&P formed both in January and late March. Prior support becomes the new resistance level after the support is broken. Further resistance is found at the 1,163 area because that level also equates to the prior highs from early 2004. Finally, resistance of the prior uptrend line from the low of August 2004 is just overhead as well. The longer-term weekly chart below illustrates the horizontal price resistance at 1,163, as well as resistance of the prior uptrend line:

In addition to the bearish chart of the S&P, bear in mind that both the Nasdaq Composite and Dow Jones Industrials are already firmly below their 200-day moving averages and will probably have great difficulty rallying back above them. With two of the three major indices sitting below their 200-day MAs, odds are good the S&P will eventually follow suit as well, but don’t expect it to be a smooth ride until that happens. The broad market has clearly been in a downtrend for the past two months, but the 200-day moving averages have made it a bumpy ride lower. For now, we recommend reducing your share size on all new trade entries and also maintaining a considerable cash position as well. By doing so, you will reduce your overall risk exposure and also enable yourself to quickly enter the markets if a smooth trend develops.

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 = + $210

DIA short (from April 26) –
short 101.96, split stop- HALF at 102.70, HALF at 103.90, target 97.10, unrealized points = + 0.08, unrealized P/L = + $16

SPY short (from April 20) –
short 114.72, stop 117.25, target 109.20, unrealized points = (1.03), unrealized P/L = ($206)

Notes:

Note the new stop on PPH.

Edited by Deron Wagner,
MTG Founder and
President