The Wagner Daily | May 6, 2005

Commentary:

The major indices spent the first half of yesterday morning trading in a relatively flat, sideways range until a mild selloff caused the broad market to move lower around 1:00 pm EST. Volume remained low during the selloff and the major indices erased a portion of their intraday losses during the final hour of trading. By day’s end, the S&P 500 and Dow Jones Industrial Average had lost 0.3% and 0.4% respectively. The Nasdaq Composite was unchanged. Total volume in the NYSE declined by 10%, while volume in the Nasdaq came in 8% lighter than the previous day. Since the broad market closed mostly lower, it was positive that volume declined. The lower closing prices on lighter volume indicated that institutions were not in a hurry to lock in the previous day’s solid gains.

One consistently reliable barometer of the broad market’s health is the performance of the Semiconductor Index ($SOX). Because the Nasdaq is so heavily weighted with semiconductor stocks, the $SOX index usually leads the direction of the Nasdaq Composite. Rarely will the Nasdaq make a large advance in EITHER direction without the $SOX leading the way. Therefore, we recommend you pay close attention to the performance of the $SOX on a daily basis. Although the index remains firmly in a downtrend, it bounced approximately 2.5% two days ago and held onto those gains in yesterday’s session. The $SOX has now rallied to within striking distance of its primary downtrend line, which is currently near the 400 level. The descending red line marks the primary downtrend on the daily chart of the $SOX below:

If the $SOX closes above the 400 level, it will mark the break of a steep downtrend that has been in place for over two months, but the index will still have a lot of overhead resistance to contend with. Specifically, the 407 to 410 level may be difficult for the $SOX to overcome due to resistance of its 200-day MA, as well as resistance of the prior lows from mid-March to early April (indicated by the blue horizontal line on the chart above). If the $SOX does break out and you would like to take a position, SMH (Semiconductor HOLDR) is the primary ETF that trades similarly to the $SOX. However, we would not recommend buying SMH unless the $SOX can close and hold above the 411 area. Beyond that, the 430 area would provide the next major resistance, as defined by the 200-week moving average.

In yesterday’s Wagner Daily, we discussed how the Dow Jones Industrials had closed above resistance of both its 200-day MA and prior lows from January and March of 2005, but cautioned that only day above a certain resistance level does not confirm a price breakout. A good example of this is the fact that yesterday’s 0.4% loss in the Dow caused the index to drop back below both its 200-day MA and also its prior lows from earlier in the year:

While the Dow could easily rally again and push firmly above its resistance, yesterday’s retracement shows why it is usually not a good idea to buy the first break of resistance on downtrending indexes, ETFs, or stocks. For educational purposes, a safer bet would be to buy DIA (Dow Jones Industrial Average) on the the next rally above Wednesday’s high. But we are not inclined to do so because of resistance of its 50-day moving average just above that.

As we mentioned yesterday, being aggressively short the broad market is no longer a low-risk proposition because the S&P is (so far) holding above the pivotal 1,163 level. However, there remains an abundance of overhead supply in each of the major indices, so heavily buying the market is equally risky. Just take a quick look at the daily charts of the Nasdaq and Dow to see the overhead supply. Maintaining a substantial cash position is ideal so that you can easily take advantage of the next move.

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 Wednesday’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:

(none)

Open Positions:

unrealized P/L = + $297

Notes:

No changes to PPH stop.

Edited by Deron Wagner,
MTG Founder and
President