The Wagner Daily | June 28, 2005

Commentary:

The major indices closed lower for a third consecutive day, but yesterday’s losses were minimal and volume declined. Both the S&P 500 and Dow Jones Industrial Average lost only 0.1%, while the Nasdaq Composite closed 0.4% lower. Unlike the previous two sessions which saw weak closing prices, each of the major indices closed in the middle of their (narrow) intraday ranges. The S&P 400 Mid-Cap Index, which posted new record highs last week, resumed its relative strength and gained 0.2% yesterday.

Total volume in the NYSE decreased by 34% yesterday, while volume in the Nasdaq came in 32% lighter than the previous day. Given that each of the major indices closed lower, the decline in volume was a positive for the bulls. The actual percentage decline in volume, however, was once again skewed by the artificially high volume levels that were associated with the prior day’s Russell rebalancing.

If you initiated new long positions during the broad market’s recent consolidation, the selloff of the past three days may have seemed quite dramatic. But if you consider how far the S&P and Nasdaq rallied throughout the month of May, the price correction has been relatively minor. When analyzing the severity of a broad market price correction, one tool we like to use is Fibonacci, which measures market corrections on a percentage basis. Put simply, any price correction of less than 38.2%, from trough to peak of an uptrend, is considered to be healthy. Uptrends that see a price correction of 38.2% or less will usually resume their uptrends and go on to set new highs. A correction to the 50% Fibonacci retracement level is less likely to resume the direction of the original trend, but still will often do so. A correction to the 61.8% level or more will usually result in a complete reversal of the prior trend. That being understood, notice that yesterday’s low in the S&P 500 correlated to a perfect 38.2% retracement. Moving averages have been removed so you can more easily see the Fibonacci retracement levels:

If the S&P does not hold at its 38.2% retracement, support of the 50-day moving average is at 1,182. Below that, the 50% retracement level should provide support at 1,177.

The Dow Jones, which lagged both the S&P and Dow during the May rally, was also the index that fell the hardest during last week’s correction. While the S&P has only corrected down to its 38.2% Fibo retracement level, the Dow has retraced down to its 61.8% retracement. Recovering from such a severe retracement will be difficult, especially considering that resistance of both the 50 and 200-day moving averages is overhead as well:

Opposite of the weakness in the Dow is the relative strength of the Nasdaq, which led the way sharply higher during the May rally. Despite the 2.5% correction of the past three days, the Nasdaq is still trading above its 38.2% Fibo retracement level. Relative strength in the tech and biotech-related sectors has made this possible:

If the Nasdaq were to reverse and rally from here, it would be very bullish because the index has not even corrected down to its first major Fibonacci support level. But even if the Nasdaq continues to correct lower, expect the index to find support first at 2,029, which is the 200-day moving average. Below that, look for the Nasdaq to find support at its 38.2% Fibo retracement level of 2,022. The 50-day moving average is at 2,016.

As we discussed in yesterday’s Wagner Daily, there is a lot of support below current price levels of the major indices. In addition to the 50 and 200-day moving averages of the S&P and Nasdaq, the Fibo retracement levels will also act as support. Therefore, it is probably not wise to put on new short positions at this time. Shorts would only be considered on a subsequent bounce IF the indices break below both their 50 and 200-day moving averages, as well as their 61.8% retracement levels. Instead, consider waiting for the major indices to find their short-term support levels, then buy the stocks and ETFs that are showing the most relative strength and holding above their primary uptrend lines. We remain long SMH (Semiconductor HOLDR) and BBH (Biotech HOLDR). PPH (Pharmaceutical HOLDR) hit its stop yesterday, but, per intraday e-mail alert, we re-entered near the same price due to support of the prior weekly downtrend line.

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:

net P/L = ($101)

Open Positions:

unrealized P/L = ($1)

BBH long (from June 16) –
bought 167.95, stop 165.10, target (new highs, will trail stop), unrealized points = (1.45), unrealized P/L = ($145)

SMH long (from June 1) –
bought 34.82, stop 32.10, target 44.90, unrealized points = (1.20), unrealized P/L = ($360)

Notes:

Per intraday e-mail alert, we re-entered PPH after it hit the stop. This was due to support of the prior downtrend line on the weekly chart, which changed over time.

Edited by Deron Wagner,
MTG Founder and
President