The Wagner Daily | June 27, 2005

Commentary:

The broad market followed through on the previous day’s bearish reversal and losses, as each of the major indices trended steadily lower throughout last Friday. Both the S&P 500 and Nasdaq Composite lost 0.8%, while the Dow Jones Industrial Average again showed the most relative weakness and closed 1.2% lower. Like the prior day, the selling was broad-based among most industry sectors and each of the major indices closed at their intraday lows. Last week began with the broad market looking good overall, consolidating near its recent highs, but it ended with a 3% loss in the Dow, a 2.1% drop in the S&P 500, and a 1.8% slide in the Nasdaq Composite. Even the S&P 400 Mid-Cap Index, which was trading at new all-time highs, fell 2.5%. On a percentage basis, it was the worst week for the broad market since the middle of April.

Total volume in the NYSE rose by 33% and volume in the Nasdaq increased by 9% over the previous day’s level. However, the volume levels were a bit deceiving at first glance. Turnover in both exchanges was running significantly lower throughout most of the day, but the last thirty minutes of the session saw a huge volume surge because last Friday was the annual Russell rebalancing day. Once a year, underperforming stocks are removed from the Russell 2000 Small Cap Index, while strong performers are added. As such, funds that track the Russell 2000 Index are corresponding required to adjust their positions to match the changes as well. In past years, this has created a huge volume surge in the final minutes of Russell rebalancing day, and last Friday’s action was no different. Because the indices closed lower on increased volume, last Friday was technically another day of institutional distribution. But if you factor out the Russell rebalancing effect, the session probably would not have been a “distribution day.”

Friday’s losses caused both the S&P 500 and Nasdaq Composite to close at the key support levels we discussed throughout the latter half of last week. Taking a look at daily chart of the Nasdaq, you will see the index closed at support of its prior lows from earlier in the month. The blue horizontal line on the chart below marks that 2,052 support level:

Because the 2,052 level is the low of the Nasdaq’s recent trading range, it represents an important area of support. As long as the Nasdaq remains above 2,052, its intermediate-term uptrend stays intact, but a firm break below that level would cause the index to set its first “lower low” since the current uptrend began at the end of April. However, the 200-day moving average should act as a major level of support at the 2,028 area.

Similarly, the S&P 500 Index also closed at support of its prior lows from earlier in June. The 1,191 level is important because a firm close below that price would cause the S&P to form its first “lower low” since the present uptrend began. We have highlighted this area of horizontal price support on the daily chart below:

If the S&P breaks below 1,191, expect the index to find support near its 50-day moving average, which is presently at the 1,181 level. Below that, the 200-day MA should also provide support at 1,173.

Of the three major indices, the Dow Jones is the only one that is sitting below support of its 20, 50, and 200-day moving averages. However, the index is still above support of its uptrend line that began with the low of April. While it’s apparent that the Dow is showing the most relative weakness, support of that uptrend line means it would not be a good risk/reward to short DIA at current levels:

Although the technical picture of the major indices is not looking too good on the daily charts, there is too much support below current levels to safely initiate new short positions. Specifically, both the S&P and Nasdaq remain above their 50 and 200-day moving averages, while the Dow is above its intermediate-term uptrend line. Only if the indices break below those levels would we look to sell short the broad-based ETFs. Even then, we would only do so on a subsequent bounce into resistance. Conversely, caution is advised on the long side of the market because many market-leading stocks have begun to fail their recent breakouts, which is often a sign of a market that is forming a top.

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 = ($53)

BBH long (from June 16) –
bought 167.95, stop 165.10, target (new highs, will trail stop), unrealized points = (0.65), unrealized P/L = ($65)

SMH long (from June 1) –
bought 34.82, stop 32.10, target 44.90, unrealized points = (0.72), unrealized P/L = ($216)

Notes:

No changes to the open positions above, but remember to use the MTG Opening Gap Rules on any positions that gap open at or below their stops.

Edited by Deron Wagner,
MTG Founder and
President