The Wagner Daily | May 5, 2005

Commentary:

The broad market followed up Tuesday’s flat Fed day with a solid intraday uptrend in which each of the major indices closed near their intraday highs. Strength was broad-based throughout most industry sectors, but the Nasdaq Composite led the way with a 1.5% gain. Both the S&P 500 and Dow Jones Industrial Average turned in similar gains of 1.2%. Yesterday was also a bullish “accumulation day” because total market volume in the NYSE increased by 7%, while volume in the Nasdaq came in approximately 4% higher than the previous day’s level. On such a follow-through day of gains, it was important for the broad market to show an increase in volume, which it did, but the increase was not very substantial.

Yesterday’s rally in the Dow put the index back above resistance its 200-day moving average, as well as resistance of its prior lows from both January and March of 2005. It was the first time since April 13 that the Dow closed above its 200-day MA. While such a move was bullish, it’s important to note that the index cleared its 200-day MA by only eight points. It closed above resistance of its prior lows by only a few points more. We point this out because it is common for an index to close above key resistance or support levels by only a small margin, only to reverse several days later. One day above a major resistance level does not confirm the resistance level has been broken, as the move could have been largely due to short covering. The chart of the Dow below illustrates yesterday’s close above its horizontal price resistance and its 200-day MA:

The most notable thing about yesterday’s broad market action was that the S&P 500 closed firmly above resistance of the 1,163 level. If the broad market rally is to continue, the 1,163 area should once again become support. However, we remain a bit skeptical as to whether yesterday’s breakout in the S&P was a fluke or if the rally can be sustained. One reason we feel this way is that the index still needs to rally back above resistance of its prior uptrend line, which became resistance when the S&P broke its uptrend on the weekly chart three weeks ago. Remember that prior support always becomes the new resistance after the support is broken. The weekly chart of the S&P below illustrates how the index closed yesterday right at resistance of the prior uptrend line:

In addition to resistance of its prior uptrend line, the S&P also has resistance of its 50-day moving average only five points above yesterday’s close of 1,175. Although the breakout above the 1,163 resistance level means we no longer feel it is low-risk to be short SPY, we also do not recommend aggressively taking on new long positions until the major indices can prove yesterday’s move was not a “one day wonder.” The recent increase in volume means the broad market is showing higher levels of institutional interest, but the volume levels remain modest overall. Continue to monitor not only price action of the broad market, but whether or not the up days continue to occur on increasing volume. More importantly, we need to begin seeing lighter volume on the down days, as the most recent down days have been bearish “distribution days.” Either way, remember to “Trade what you see, not what you think!”

Today’s watch list:

There are no new plays for today. We do, however, remain long PPH with a 3 point unrealized gain. Upon determining if yesterday’s trend reversal is legitimate, we will look to enter new ETF positions.

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:

net P/L = ($338)

SPY short (from April 20) –
short 114.72, covered 117.26, points = (2.54), net P/L = ($512)

Open Positions:

unrealized P/L = + $310

Notes:

Note the new stop on PPH long. Both short positions stopped out yesterday, as noted above. Average DIA cover price reflects updated stop that was sent via intraday e-mail alert.

Edited by Deron Wagner,
MTG Founder and
President