The Wagner Daily | May 12, 2005

Commentary:

The broad market spent the first half of the day trending lower, following through on the previous day’s weakness, but the major indices reversed and closed higher in the afternoon. At its worst level of the session, the Nasdaq Composite was trading 1% lower than the previous day’s close, but late afternoon buying interest enabled the index to close with a 0.4% gain. The S&P 500 followed a similar intraday pattern and also moved 0.4% higher. The Dow Jones Industrial Average notched a 0.2% gain. It was a rather indecisive day overall, but the volatile action was not surprising given that the S&P 500 remains trapped between major areas of support and resistance (as illustrated in yesterday’s newsletter).

What started out as a “distribution day” in the Nasdaq eventually became a bullish “accumulation day,” as volume in the exchange increased by 7%. Total volume in the NYSE, however, did not confirm the “accumulation day” because turnover declined by 4% from the previous day’s level. Advancing issues in the NYSE marginally beat declining issues, but the decliners outpaced advancers in the Nasdaq. Nevertheless, overall advancing volume in the Nasdaq outpaced declining volume by a margin of nearly 2:1. The mixed market internals confirmed the intraday indecision within the major indices.

In the April 28 issue of The Wagner Daily, we pointed out the potential intermediate-term short setup on the Banking Index ($BKX), which had just broken below support of its weekly uptrend line. Since then, the index has failed to recover back above resistance of its prior uptrend line and now appears poised to roll over after last week’s failed breakout above the 20 and 50-week moving averages. The weekly chart below illustrates this:

We bring this chart to your attention because we still feel the index provides an ideal short-entry point for intermediate-term traders. A short entry at current levels now carries a lower degree of risk than before due to last week’s failed breakout attempt, which most likely shook out many of the short sellers on the intra-week upward spike. There is not an ETF that directly tracks the Banking Index, but consider trading XLF, which is a diversified financial ETF. XLF is listed as an ETF trade setup on Today’s Watchlist below. We also remain short DIA (Dow Jones Tracking Stock).

The technical picture of the major indices has not changed since yesterday’s Wagner Daily. The S&P 500 Index remains stuck between support of its 200-day MA (which it bounced off of yesterday) and overhead resistance of the 50-day MA. Both the Dow Jones Industrials and the Nasdaq Composite remain below both their 50 and 200-day moving averages, but have minor support of their 20-day MAs below. Because the broad market typically follows the path of least resistance, odds would favor sideways to lower price action in both the Nasdaq and Dow, but the S&P is acting resilient and trying to hold above support. Therefore, we continue to recommend caution on both sides of the market until the broad market resolves itself firmly in one direction or the other.

Today’s Watchlist:

XLF – S&P Financial Spyder
Short

Trigger = below 28.65 (below the 50-day MA)
Target = 27.10 (support of October 2004 low)
Stop = 29.28 (above the prior high)

Notes = XLF is heading back down after failing to rally back above resistance of its 200-day moving average. The weekly chart appears even more bearish, with the right shoulder of a head and shoulders pattern being formed. Note that XLF has a very low beta, so you must increase your share size to compensate for the minimal volatility. Consider using the MTG Position Model as a gauge.

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 = + $30

Notes:

No changes to the open position.

Edited by Deron Wagner,
MTG Founder and
President