The Wagner Daily | July 6, 2005

Commentary:

Traders returned from the extended holiday weekend in a bullish mood, as broad-based gains pushed both the S&P 500 and Nasdaq Composite above last week’s highs. After a marginally lower opening, the major indices trended higher throughout the morning session, then held near the highs and traded sideways throughout the afternoon session. The Nasdaq Composite gained 1.0%, the S&P 500 moved 0.9% higher, and the Dow Jones Industrial Average closed with a 0.7% gain. Yesterday’s 1.0% gain in the market-leading S&P 400 caused the mid-cap index to once again close at a new all-time high. The Russell 2000 Small-Cap Index, which is becoming a better benchmark than the Nasdaq, sprinted 1.6% higher and set a new high of the year. Each of the indices also closed near their intraday highs, which is a positive sign for today’s session.

As you would expect to see after a holiday weekend, volume in both the NYSE and Nasdaq increased over last Friday’s levels, but only by 17%. Although a 17% increase in turnover initially sounds impressive, bear in mind that volume in last Friday’s session was nearly 30% lighter than the previous day. Yesterday technically counted as a bullish “accumulation day,” but it would have been nice if volume at least exceeded its 50-day average levels. Nevertheless, market internals were firmly positive in both exchanges, as advancing volume exceeded declining volume by more than 2 to 1. Overall, remember that lighter volume levels are typical of the “summer doldrums,” so it’s not a major problem that volume came in below its average range.

Yesterday’s rally caused several of the broad-based ETFs to rally above the key resistance levels we illustrated in yesterday’s Wagner Daily. Of particular significance was that SPY (and the S&P 500) held last week’s low and rallied to close above last week’s high. This action caused SPY to break out of the “bear flag” formation that was forming on its daily chart, and also put SPY back above its 20-day moving average. However, yesterday’s rally once again caused SPY to close in “no man’s land,” as the S&P 500 is now sitting in the middle of its six-week range. The red horizontal lines on the daily chart of SPY below illustrate the support and resistance levels of its six-week trading range:

The Nasdaq Composite followed a similar pattern as the S&P 500 yesterday, as the index also held above last week’s low and rallied to close above both its 20-day MA and last week’s high. But unfortunately, the Nasdaq also now sits near the middle of its six-week trading range. We have annotated the daily chart of the Nasdaq Composite in the same manner:

Even though the Nasdaq Composite is back above its 20, 50, and 200-day moving averages, be aware that the tech-heavy Nasdaq 100 Index (and QQQQ which tracks it) does not look as healthy. Because the Nasdaq 100 corrected more than the Nasdaq Composite, the index is still below both its 20 and 200-day moving averages, although yesterday’s rally put it back above its 50-day MA. The daily chart below illustrates how the QQQQ (and the Nasdaq 100) is now poised to test overhead resistance of its 200-day MA, which converges with last week’s high. Watch this resistance level closely in today’s session:

The Dow Jones continues to lag behind and has been hindering the upward progress in both the S&P 500 and Nasdaq Composite. Despite yesterday’s 0.7% gain, the index remains below its 20, 50, and 200-day moving averages. Watch for a tests of resistance on DIA at $104.03 (50-day MA), $104.43 (200-day MA), and $104.66 (20-day MA). For the Dow Jones index, those same resistance levels correspond with the following price levels respectively: 10,403, 10,440, and 10,467 (just multiply the price of DIA times 100).

Range-bound markets are always challenging for trend traders because they force you to take profits quickly and become much more selective with new trade entries. As long as both the S&P 500 and Nasdaq Composite remain in the middle of their intermediate-term trading ranges, we recommend caution with entering new positions. The fact that the small and mid-cap indexes are sitting at all-time highs should help to pull the S&P and Nasdaq higher and out of their trading ranges, but the relative weakness in the Dow Jones continues to act as an anchor. When the indices begin to trade in sync with each other, it will provide ideal conditions for trend traders such as ourselves. But until that happens, we recommend selectively targeting specific industry sector ETFs with relative strength or weakness as opposed to trading the broad-based ETFs.

Today’s Watchlist:

As the major indices remain in their trading ranges, there are no new trade setups for today. However, we remain long PPH, SMH, and BBH from last month’s entries.

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 = + $218

PPH long (re-entry from June 27) –
bought 73.55, new stop 72.60 (due to MTG Gap Rules), target 79.60, unrealized points = (0.54), unrealized P/L = ($54)

SMH long (from June 1) –
bought 34.82, new stop 32.40, target 44.90, unrealized points = (0.47), unrealized P/L = ($141)

Notes:

We have raised the stop on SMH, as per above. Per intraday e-mail alert, we also used the MTG Opening Gap Rules to manage the stop on PPH yesterday. As such, the stop has been adjusted to 10 cents below yesterday’s low.

Edited by Deron Wagner,
MTG Founder and
President