The Wagner Daily | July 25, 2005

Commentary:

The major indices spent most of Friday’s session trading sideways to lower, in a narrow range, but buying interest during the final ninety minutes lifted the broad market into positive territory. The S&P 500’s choppy morning session resolved itself with a 0.5% closing gain. It moved higher by the same percentage for the full week. The Nasdaq Composite turned an early 0.6% loss into a 0.1% gain last Friday and also advanced 0.6% for the week. Friday’s 0.2% gain in the Dow Jones Industrial Average enabled the index to scrape by with a 0.1% weekly gain. Small and mid-cap stocks recovered from their recent correction and are once again showing solid relative strength. The S&P 400 Mid-Cap Index rallied 0.9% last Friday, while the Russell 2000 Small Cap Index powered 1.6% higher. Both indices finished near their best levels of the week and once again achieved new all-time weekly closing highs.

The Oil Service sector ($OSX) surged 5.3% higher last Friday, correspondingly causing OIH (Oil Service HOLDR) to set a fresh record high. The Philadelphia Semiconductor Index ($SOX) also continued its steady ascent by advancing another 1.3%. The Biotech Index ($BTK) dropped 2.6% for the day, but considering its recent parabolic move, the sector was due for a price correction.

Total volume in the NYSE declined by 15% last Friday, while volume in the Nasdaq came in 18% lighter than the prior day. Given that the previous session was a day of higher volume selling (aka “distribution”), it was not surprising that volume dropped off when the market attempted to rebound. Regardless of the lower volume level, market internals were bullish across the board. Advancing volume exceeded declining volume by more than 2 to 1 in the NYSE, while advancing issues similarly outnumbered declining issues by 2 to 1. Nasdaq internals were also positive, but by a lesser margin.

Taking a look at last week’s broad market action, we concluded that it was positive overall. After a session of light volume losses on Monday, both the S&P 500 and Nasdaq Composite indices promptly reversed and registered new 4-year closing highs on Tuesday and Wednesday. The major indices subsequently corrected on Thursday with their first higher volume “down” day since July 6. Rather than following through to the downside or consolidating at the lows, the bulls returned and enabled the broad market to close higher on Friday (albeit on lower volume). Our analysis of the week’s performance indicates a healthy market, but one that may enter a consolidation phase in the short-term.

Just as rapidly falling markets eventually correct through sideways consolidation or bouncing for a few days, uptrending markets do not go straight up without pausing along the way. A look at their daily charts illustrates how rapidly the S&P and Nasdaq have recovered during the past several months. From its April 29 low through last Friday’s close, the Nasdaq Composite has gained more than 15%. The S&P 500 has gained 8.5% since its April low. Both indices have also become extended above their 20-day moving averages and are likely to have difficulty moving higher in the short-term without experiencing some type of correction first. A “correction by time” occurs when the major indices trade sideways (consolidate), which enables the moving averages to rise up and provide support for the next leg higher. Conversely, a “correction by price” is simply a price retracement lower that accomplishes the same thing.

Because the markets have been acting so well, a sideways consolidation (“correction by time”) is the more likely scenario. But in the event of a price retracement, note that support should be found at the following levels: S&P 500 – 1,221 (last week’s low), Nasdaq Composite – 2,154, Dow Jones Industrials – 10,576. As for resistance, the S&P 500 and Nasdaq Composite both have only minor resistance of last week’s highs at 1,236 and 2,193 respectively. The Nasdaq is likely to have a little more difficulty, however, because last week’s high also corresponds to its prior high from January 3:

The Nasdaq is sitting at a new weekly closing high, but still has minor resistance from the intraday high of January 3. But above that level, there is no resistance for either the Nasdaq or S&P because both indices will once again set new 4-year highs. The Dow, on the other hand, continues to be a laggard and should be avoided on the long side.

Many key companies already reported their quarterly earnings last week, but beware of more companies that are reporting this week. Expect continued market volatility and indecision until earnings season has concluded. Check the free Yahoo! Finance earnings calendar to check earnings dates of any companies.

Today’s Watchlist:

There are no new plays for today, as we now have three open positions (SMH and FXI long, UTH short)

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. 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 = + $798

SMH long (from June 1) –
bought 34.82, stop 34.60, first target 38.85, then 44.90, unrealized points = + 2.40, unrealized P/L = + $720

UTH short (from July 20) –
short 112.67, stop 114.30, target 108.05, unrealized points = (0.28), unrealized P/L = ($28)

Notes:

No changes to stops on open positions.

Edited by Deron Wagner,
MTG Founder and
Head Trader