The Wagner Daily | May 18, 2005

Commentary:

After beginning the day with an opening gap down, the broad market spent the first half of the day chopping sideways in a tight range. But late-afternoon buy programs hit the markets during the last ninety minutes of the day and caused each of the major indices to reverse their early losses and close with solid gains. The Dow Jones Industrial Average led the way higher with a 0.8% gain. The S&P 500 closed 0.7% higher and the Nasdaq Composite gained 0.5%. Like the previous day, each of the major indices closed at their intraday highs, commonly a sign of institutional support.

Overall volume levels increased yesterday, which is positive, but turnover still came in below average levels. Total volume in the NYSE increased by only 2%, while volume in the Nasdaq came in 9% higher than the previous day. The higher volume, combined with higher closing prices, means that yesterday was technically a bullish “accumulation day” in both exchanges. However, considering the prior day’s 24% drop in Nasdaq volume and 15% drop in NYSE volume, yesterday’s volume increases were marginal. In both exchanges, total market volume came in below their 50-day average levels. It appears institutions are “testing the water” on the long side of the market, but have yet to return in full force.

Yesterday’s 0.7% gain in the S&P 500 caused the index to once again close at resistance of its 50-day moving average. On May 9, the S&P 500 closed at the 50-day MA, but that pivotal moving average “did its thing” as resistance and caused the index to sell off sharply the next day. Because a “higher low” was formed on the daily chart since the May 9 test of resistance, odds are better that the S&P will push through its 50-day moving average this time around. The lighter than average volume levels, however, will certainly not help the situation. Below is a daily chart of the S&P 500:

Even if the S&P does manage to close above its 50-day MA today, remember there is resistance of the prior uptrend line on the weekly chart. The uptrend line that had formerly been in place since the low of August 2004 was broken five weeks ago and has now become the new intermediate-term resistance level. For the past two weeks, the index has attempted, but failed, at rallying above the new resistance of its prior uptrend line. The prior uptrend line is now near the 1,181 level, so expect resistance even if the S&P clears its 50-day MA:

To clearly illustrate how the volume levels in the S&P have been bearish, take a look at the daily chart of SPY (S&P 500 Index) below. Notice how the “down” days of May 12 and 13 occurred on much higher volume than the volume of the past two “up” days. This is exactly the opposite of what you should see in a healthy, uptrending market:

The daily chart of the Nasdaq Composite is interesting because the index broke out above its 200-day moving average yesterday, but has now run into resistance of its primary downtrend line from the high of January 3, 2005. The red descending line on the chart below illustrates current resistance of the downtrend line. The Nasdaq actually closed a few points above its downtrend line yesterday, but this is not yet enough to confirm a breakout:

Of the three major indices, the Dow remains the weakest on an intermediate-term basis. It is now the only index that remains below both its 50 and 200-day moving averages. Overhead supply from its prior highs during its last breakout attempt at the 200-day MA also adds to the resistance:

The market overall is starting to look a little more bullish, but the lighter than average volume levels make us suspicious of how long the rally can last. When you consider that the S&P still has resistance of its prior uptrend line and the Nasdaq is now at resistance of its downtrend line, we are even more cautious about entering new long positions. Conversely, it is becoming a bit difficult to stay short as well. Therefore, it may be a good time to pull in the reigns and revert to a mostly cash position, at least for a few days until the market proves whether or not it can hold its gains and build a solid base. If so, then we will begin to look for new long positions next week. If not, then we can expect more chop and indecision to continue with an overall downward bias.

Today’s Watchlist:

There are no new trade setups for today because we currently have three open ETF positions (short DIA, XLF, and UTH)

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 = ($16)

DIA short (from May 10) –
shorted 103.17, stop HALF at 103.69, HALF at 104.26, target 97.20, unrealized points = (0.32), unrealized P/L = ($64)

XLF short (from May 12) –
shorted 28.63, stop 29.28, target 27.10, unrealized points = (0.28), unrealized P/L = ($168)

Notes:

We have switched to a split stop on DIA due to resistance of the 200-day MA overhead, as well as its relative weakness.

Edited by Deron Wagner,
MTG Founder and
President