The Wagner Daily | July 26, 2005

Commentary:

The broad market trended higher throughout the first ninety minutes of yesterday’s session, but the major indices were unable to sustain their strength and drifted lower throughout the afternoon. The S&P 500 Index briefly rallied to a new four-year high in the morning, but ultimately closed 0.4% lower. The Nasdaq Composite lost 0.6%, while the Dow Jones Industrial Average gave up 0.5%. The S&P 400 Mid-Cap Index similarly lost 0.6%, but small caps corrected the most with the Russell 2000 Index dropping 1%. Industry sectors were mixed with no significant moves except that Oil and Oil Services sectors followed through with another day of new highs.

It was positive that total volume in the NYSE declined by 7% yesterday, while volume in the Nasdaq was 10% lighter than the previous day. The fact that volume was lower on a day of broad-based losses indicates there was a lack of institutional selling (aka “distribution”). Last Friday’s gains were on lighter volume and yesterday’s losses occurred on ever lighter volume. This is how the market typically reacts when it is “correcting by time” through a sideways consolidation in a range near the highs. Volume will probably remain light until the broad market breaks out of its range that has been established over the past several days.

As anticipated per our analysis in yesterday’s Wagner Daily, it appears the broad market is now entering a short-term, sideways “holding pattern” that will allow it to digest its recent gains. As such, it is a good idea to know the support and resistance levels that represent the sideways range so that you can profit from a breakout of this range. On the charts of the major indices below, we have drawn horizontal lines to illustrate the short-term areas of support and resistance that constitute the current short-term trading range. The blue lines are support levels and the red lines are the resistance levels. The beige line is the 20-day moving average (which has begun rising up to provide support) and the aqua colored line is the 50-day MA. The thick orange line is the 200-day MA. Also note that the corresponding support and resistance levels for the SPY and DIA exchange traded funds can be closely approximated by dividing by 10:

While the support and resistance levels labeled above provide us with a good idea of when the indices have broken out of their short-term ranges, bear in mind that an intraday probe above resistance or below support does not count as breaking out of the range. Markets that are in ranges will often see intraday “stop hunts” above or below pivotal resistance or support levels, but a real break out of the range can only be confirmed with a closing price above or below the range. Yesterday’s probe above the 1,236 resistance level in the S&P 500 is a good example of this. Until we see a confirmed breakout of the ranges above, we advise caution entering new positions. Instead, focus on managing your existing positions because it is easy to get “chopped up” when attempting to trade markets that are in tight ranges of consolidation.

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 = + $792

SMH long (from June 1) –
bought 34.82, stop 34.60, first target 38.85, then 44.90, unrealized points = + 2.16, unrealized P/L = + $648

UTH short (from July 20) –
short 112.67, stop 114.30, target 108.05, unrealized points = (0.35), unrealized P/L = ($35)

Notes:

No changes to stops on open positions.

Edited by Deron Wagner,
MTG Founder and
Head Trader