The Wagner Daily | May 25, 2005

Commentary:

Like the prior two sessions, the broad market once again traded in a tight and narrow sideways range throughout most of the day. Each of the major indices were poised for slightly lower closing prices, but buying interest after comments from the late afternoon FOMC meeting lifted the indices to a mixed close. The Nasdaq Composite gained another 0.2% yesterday, giving the index its eighth consecutive day of gains for the first time since December of 1999! The Dow Jones Industrial Average conversely closed lower by 0.2%. The S&P 500 Index gained less than 0.1%. The mixed market performance was confirmed by mixed market internals as well. Advancing volume continued to outpace declining volume in the Nasdaq, but it was the opposite picture in the NYSE. As we have been saying for the past two weeks, the tech and biotech-related sectors of the Nasdaq are clearly among the safer places to be if you’re currently long the market.

Total volume in the Nasdaq rose by 3%, while volume in the NYSE market came in only 1% above the previous day’s level. Since the Nasdaq closed higher and on higher volume, yesterday was another bullish “accumulation day” for the Nasdaq. However, the same could not be said of the S&P 500 because the index closed flat and on volume that was nearly the same as the prior day. Although the S&P has moved higher in three of the past four sessions, volume has come in below average levels for each of the past four days. Interestingly, the past two days’ volume in the NYSE have been the two lightest volume days of the year. While lighter volume would be bullish if the S&P and Dow had been correcting during the past several days, it’s not exactly what we want to see when both indices are continuing to register gains. Gains that occur on lighter than average volume can be easily erased with one day of institutional selling.

On the surface, the overall price action of the broad market during the past three days may seem boring or inconsequential, but a closer look at what has been happening reveals a different paradigm. Throughout the months of March and April, the broad market was in a clearly defined downtrend. As we often see in weak markets, nearly every rally attempt was quickly followed by one or two days of higher volume institutional selling (aka “distribution”). However, that scenario has changed this month.

Both the S&P 500 and Dow Jones Industrial Average rallied in each of the four days spanning from May 16 – 19. In recent months, such gains would have been promptly met by institutional selling. Instead, both indices have traded sideways to higher and have held on to all of their gains during the past three days. Thanks to strength in the Semiconductor sector, the Nasdaq’s performance has been even more impressive. The Nasdaq Composite has notched eight straight days of gains since May 13. More importantly, it did so on higher volume (“accumulation”) on five of those eight days!

In the May 20 issue of The Wagner Daily, we examined in close detail the newfound strength in the Semiconductor Index ($SOX). Of most significance was that the index was nearing a breakout above resistance of its 200-week moving average, which also converges with resistance of the long-term weekly downtrend line. Since then, the index has remained incredibly strong, as it has closed higher in nine of the past ten sessions. Yesterday’s 1.6% gain in the $SOX put the index two points above the closely-watched 200-week moving average. If the index closes this week above the 200-week MA, it will be the first time it has done so since March of 2002 (with the slight exception of a fractional close above the 200-MA on the week ending February 25, 2005). The weekly chart below shows how the index is potentially poised for a major break of the long-term downtrend:

In yesterday’s Wagner Daily, we pointed out the Dow’s current resistance level at the 10,550 area. Given that the Nasdaq and S&P closed higher yesterday, but the Dow closed lower, this area of horizontal price resistance is significant. Going into today, continue to keep an eye on that level because the broad market is not likely to advance much further if the Dow does not participate at least marginally. As for the Nasdaq, there’s not much new to say. It clearly remains very strong, but has gone up very quickly without any correction to allow low-risk entry points into new positions. Trailing stops on existing long positions and patience before entering full size of new positions is the best strategy for the Nasdaq.

Today’s Watchlist:

There are no new plays for today, although we will be looking for long positions on the first minor correction in the Nasdaq. Both SMH and BBH are looking good for long entry on a correction. As always, we will send an intraday e-mail alert to Wagner Daily subscribers if/when we enter any new ETF positions intraday.

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 = ($98)

Notes:

No changes today.

Edited by Deron Wagner,
MTG Founder and
President