The Wagner Daily | October 12, 2005

Commentary:

The broad market’s steady downtrend continued yesterday, as stocks registered another day of higher volume losses. Although the major indices began the day with an opening gap up, the bears took control after the first hour of trading and caused both the S&P and Nasdaq to fall below their respective lows of the previous day. Stocks attempted to reverse later in the afternoon, but it was a frivolous effort. Sellers were in force during the final hour of trading and the major indices closed near their intraday lows. Small caps led the way lower, as the Russell 2000 Index fell 1.2%. IWM (iShares Russell 2000 Index), which we have been short since October 4, correspondingly moved lower and is now showing a marked to market gain of approximately 4 points. The Nasdaq Composite, which often follows the direction of small cap stocks, lost 0.9%. The midcap S&P 400 Index dropped 0.6%, but the S&P 500 lost only 0.2%. The Dow Jones Industrial Average bucked the trend and eked out a gain of 0.1%.

Volume rose across the board yesterday, causing both the S&P and Nasdaq to register another bearish “distribution day.” Total volume in the Nasdaq surged 32% higher, while volume in the NYSE was 6% higher than the previous day’s level. Not surprisingly, market internals were negative as well. Declining volume exceeded advancing volume by a margin of 3 to 1 in the Nasdaq. The NYSE ratio was negative by only 1.8 to 1. A majority of the down days over the past month have occurred on higher volume, while only one up day has been on higher volume. This clearly indicates that institutions have been steadily selling. The downtrends on the daily charts of the major indices confirm this as well.

The technical breakdown that began earlier this month escalated further yesterday, as the broad market closed at new multi-month lows and more of the indices fell below their 200-day moving averages. In yesterday’s Wagner Daily, we discussed how the Semiconductor Index ($SOX) had broken support and was headed down to its 200-day MA as well. The $SOX, which lost another 1.7% yesterday, has been a major drag on the Nasdaq. Although it tried valiantly to hold above its 200-day MA, downward pressure in the small caps and tech stocks caused the Nasdaq Composite to finally close below its 200-day moving average as well. It was the first time the index has closed below its 200-day MA since May 16 of this year. The Nasdaq has posted losses in five of the last six sessions since rallying into resistance of its daily downtrend line on October 4:

Although not shown on the chart above, the Nasdaq has a band of horizontal price support at the 2,050 area that was established throughout the month of June. Odds are good the Nasdaq will bounce after its initial test of this support level. As such, this would be a good area to take profits on any short positions. At the least, we recommend tightening your stops on any Nasdaq-related short positions so that you can protect profits. Even though the daily chart shows price support ten points below yesterday’s close, note that the Nasdaq has just broken support of its three-year uptrend line on the long-term monthly chart:

Joining the Nasdaq on yesterday’s break of the 200-day moving average was the smallcap Russell 2000 Index, which similarly closed below its 200-day MA for the first time since May 17:

Like the Nasdaq, the Russell also has fallen below support of its multi-year uptrend line on the monthly chart. As such, we remain confident that our short position in IWM, which tracks the Russell, will hit its profit target of 61.10. But regular subscribers will notice we have trailed our stop lower to protect profits in case it does not.

The S&P 500 has been trading below its 200-day MA for the past week, while the Dow has not closed above the 200-day MA since September 30. This means that all three of the major indices are now below their 200-day moving averages, a bleak sign for the intermediate and long-term direction of the broad market. Although the technical picture of the market is quite bearish right now, remember that nothing goes straight down for long without bouncing along the way. Don’t get sloppy on initiating new short positions without proper entry points. Nevertheless, we definitely are not advocating new long positions in an attempt to catch a bottom. Major technical damage has been done and retail “panic selling” could cause the Nasdaq to fall much further before finding support. The charts show no reason to be positioned on the long side of the market right now, except perhaps in gold-related issues. The start of quarterly earnings season is another good reason to be cautious.

Today’s Watchlist:

There are no new trade setups for today, as we are now near our max. exposure based on the $50,000 cash position model.

Daily Performance Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:

Open positions (coming into today):

stop 47.26

, unrealized P/L = + $1,680

IWM short (250 shares from Oct. 4 entry; 250 shares already closed) –
shorted 66.43, stop 63.65, target 61.10, unrealized points = + 3.93, unrealized P/L = + $983

MDY short (400 shares from Oct. 10 entry) –
shorted 125.78, stop 126.15, target 121.10, unrealized points = + 0.94, unrealized P/L = + $376

Closed positions (since last report):

Current equity exposure ($100,000 max. buying power):

$93,995

Notes:

MTG Opening Gap Rules

Click
here for glossary and explanation of terms used in The Wagner Daily

Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader