The Wagner Daily | June 24, 2005

Commentary:

A narrow-based tech rally pushed the Nasdaq Composite above the 2,100 resistance level late yesterday morning, but relative weakness in the Dow and S&P 500 caused the index to reverse and collapse in the afternoon. At 12 noon EDT, the Nasdaq was trading at a new 5-month high and showing an unrealized gain of 0.7%, but an aggressive selloff throughout the afternoon caused the index to close at its intraday low and with a 1.0% loss. Total volume in the Nasdaq also surged 21% higher, giving the index its first bearish “distribution day” since June 7. The Nasdaq’s late morning breakout with the sharp reversal in the afternoon trapped a lot of bulls who mistakenly assumed the index had finally broken out above the pivotal 2,100 resistance level. This further accelerated the downward momentum yesterday afternoon and actually caused the Nasdaq to close below support of its 20-day moving average for the first time since May 3. The daily chart of the Nasdaq below illustrates yesterday’s failed breakout:

Needless to say, yesterday’s price and volume action in the Nasdaq was quite bearish, but at least the index is still within its June trading range. The next key support level is the prior low of 2,053, which was set both on June 9 and 15. As long as the Nasdaq holds above that level, the weekly chart will continue to show bullish consolidation. But a break below the 2,053 level would cause the Nasdaq to set a “lower low,” which would correspondingly break the Nasdaq’s two-month uptrend. If you are long the tech stocks or ETFs, keep a close eye on the 2,053 level because the bullish sentiment could change quickly if that level is violated.

The price action in both the Semiconductor Index ($SOX) and SMH (Semiconductor HOLDR) was a real disappointment yesterday. At mid-day, SMH was trading at a fresh 11-month high and sporting an impressive gain of 2.5%, but it collapsed and closed 0.3% lower! The $SOX traded in a similar fashion, as the index gave up a 3.0% gain to close only 0.3% higher. SMH closed just above support of its 20-day MA and is still within its June trading range, but yesterday’s reversal caused a very ugly “inverted hammer” candlestick to form on its daily chart:

So what caused the morning excitement in the tech stocks to swan dive in the afternoon? Undoubtedly, it was the relative weakness in the S&P and Dow, both of which failed to confirm the morning strength. Although the $SOX and many other tech-related sectors were showing solid gains in the first half of the session, the rest of the stock market failed to notice. While it is true that the Semis often lead the broad market, it is also true that gains are rarely sustained without at least a bit of broad market strength. While the Nasdaq and the Semis were trending higher in the late morning, the Dow was simultaneously trending lower. At 12 noon EDT, the Nasdaq was trading 0.7% higher and the $SOX was up 3.0%, but the Dow Jones Industrial Average was showing a 0.2% loss. The S&P 500 could only manage to hold flat at the previous day’s close. The failure of the broad market to confirm the strength in tech-land eventually acted as an anchor on the Nasdaq. When the Nasdaq also began to show weakness in the early afternoon, the selling momentum in the Dow and S&P increased sharply. By day’s end, the Dow Jones closed with a substantial 1.6% loss, while the S&P 500 closed 1.1% lower. Total volume also came in 17% higher than the previous day’s level, firmly registering a bearish “distribution day” in the NYSE. From a technical point-of-view, the worst thing was that the Dow completely broke below support of its 5-week range and closed below its 200-day moving average:

The Dow’s 50-day moving average may provide support at the 10,375 level, but this is not an index you want to be long right now. Yesterday’s range expansion in the Dow will probably lead to lower prices in the coming days. Conversely, it may still be too early to sell short DIA (Dow Jones Tracking Stock) because the index is still above the lower channel support of its two-month uptrend line (the blue ascending line on the chart above).

Like the Nasdaq Composite, the S&P 500 also closed below support of its 20-day moving average yesterday, but the index looks a bit healthier than the Dow. Watch for support on the S&P at the 1,191 level, which was the prior low of its recent trading range. Below that, the 50-day MA should lend support at the 1,180 level.

If you’re long the tech stocks and ETFs, things still may work out okay for you, but be sure to keep stops in place to protect profits on any positions you were holding throughout the May rally. If you bought stocks when the Nasdaq broke out above 2,100 yesterday, don’t be stubborn and hold on to your losing positions. It’s better to take the small losses, go to cash, and re-evaluate market action over the next several days. There will be plenty of time to get back in if and when the Nasdaq finally does break out for real. As for the Dow and S&P stocks and ETFs, you are probably in for a more difficult time if you’re long. Consider closing those positions and selectively looking for a few shorts in industry sectors that are showing the most relative weakness. A mix of long positions in the strong sectors and a few shorts in the weak ones is not a bad way to play the current environment. Alternatively, there is always the king of all positions. . .CASH!

Today’s Watchlist:

There are no new trade setups for today, as we are now long three ETF positions (BBH, SMH, and PPH).

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 = + $0

SMH long (from June 1) –
bought 34.82, stop 32.10, target 44.90, unrealized points = (0.20), unrealized P/L = ($60)

BBH long (from June 16) –
bought 167.95, stop 165.10, target (new highs, will trail stop), unrealized points = (1.75), unrealized P/L = ($175)

Notes:

No changes to the open positions above, but remember to use the MTG Opening Gap Rules if BBH (or anything else) gaps down below the stop..

Edited by Deron Wagner,
MTG Founder and
President