The Wagner Daily | July 1, 2005

Commentary:

The broad market spent the first half of yesterday trading within the previous day’s narrow range, but the major indices sold off on heavy volume after the FOMC announced a quarter-point increase in the Fed Funds Rate. Although the change in interest rates was widely expected, the Feds hinted that additional rate hikes would follow. The market’s negative reaction resulted in a 0.6% loss for the Nasdaq, a 0.7% decline in the S&P 500, and a 1% drop in the Dow Jones Industrial Average. The S&P 400 Mid-Cap Index maintained its recent relative strength by closing only 0.4% lower, as did the Russell 2000 Small Cap Index.

Total volume in the NYSE surged 15% higher yesterday, while volume in the Nasdaq came in 5% higher than the previous day. This made yesterday a confirmed day of institutional selling, also known as a “distribution day”. While one or two days of high volume selling within the course of an uptrend is normal and unlikely to result in technical damage to the broad market, three or four within a period of several weeks can cause a rally to fall apart. The month of June saw three confirmed “distribution days” in both the NYSE and Nasdaq, so this bearish volume action alone puts the recent correction in jeopardy of further losses.

Yesterday afternoon’s selloff caused each of the major indices to close near their respective lows of the June 23 to June 27 selloff. When the broad market rallied on June 28, it initially looked like the correction would be short-lived. But as we mentioned in the following day’s newsletter, the real question is whether or not we would see any follow through to the one-day bounce. Given that yesterday’s losses took the major indices back down to their June 27 lows, it is not looking too good so far. Below are daily charts of the S&P 500, Dow Jones, and Nasdaq Composite that illustrate how each index closed just above its June 27 low:

Based on the closing prices near the June 27 lows, the direction of the major indices over the next few days is likely to determine the broad market’s bias throughout the month of July. As we have seen many times in the past, it is possible that yesterday afternoon’s selloff may have simply been a knee-jerk reaction to the Fed announcement. If that was the case, the indices could find support here at the prior lows and attempt to rebound. It also helps that both the S&P 500 and Nasdaq Composite are showing support of their 50 and 200-day moving averages just below their June 27 lows as well. But if the major indices begin to break below their 50 and 200-day moving averages, expect a negative month of July. For now, your best bet is to hold off on entering new positions until the market shows its hand. Instead, focus on managing any existing open positions. As always, be sure to honor your stops and remember to Trade what you see, not what you think!

NOTE: The U.S. equities markets are closed on Monday, July 4 for the Independence Day holiday. As such, The Wagner Daily will not be published on Monday. Regular publication will resume on Tuesday, July 5.

Today’s Watchlist:

GLD – StreetTRACKS Gold Trust
Long

Trigger = above 43.80 (above yesterday’s high)
Target = 45.90 (just below December 2004 high)
Stop = 42.90 (below low of June 16 gap)

Notes = This trade did not trigger yesterday, but we still like the setup with the same trigger price for entry. The position size of GLD is not yet listed on the Wagner Daily position model because we have not yet traded this new ETF. However, the position size will be 400 shares (a multiplier of 2x based on the position model). See commentary in the June 30 issue of The Wagner Daily for explanation of the trade setup.

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 = ($65)

PPH long (re-entry from June 27) –
bought 73.55, stop 72.90, target 79.60, unrealized points = (0.23), unrealized P/L = ($23)

SMH long (from June 1) –
bought 34.82, stop 32.10, target 44.90, unrealized points = (1.15), unrealized P/L = ($345)

Notes:

There are no changes to the open positions or stops.

Edited by Deron Wagner,
MTG Founder and
President