The Wagner Daily | October 19, 2005

Commentary:

The major indices traded in a sideways range throughout the first half of yesterday morning, but the bears took control in the afternoon, causing stocks to close firmly lower across the board. As expected, both the Nasdaq Composite and smallcap Russell 2000 Index reversed after running into resistance of their 10 and 200-day moving averages and closed lower by 0.7% and 1.3% respectively. The S&P 500 shed 1.0% and the Dow Jones Industrials fell 0.6%, but the midcap S&P 400 Index suffered a 1.2% loss. As we commonly see in weak markets, each of the broad-based indices closed at their intraday lows.

Turnover increased in both exchanges yesterday, resuming the trend of higher volume on the down days. Total volume in the NYSE was 5% higher, while volume in the Nasdaq increased by 16% over the previous day’s level. Both the S&P and Nasdaq registered another bearish “distribution day,” but this was not surprising considering that volume had declined in each of the three prior up days. The last six days in the Nasdaq have consisted of three down days on higher volume and three up days on lower volume. Furthermore, there has not been a single “accumulation day” this month, but there have been many “distribution days.” Such a pattern tells us that institutional players such as mutual and hedge funds are continuing to sell into strength, while only retail investors are interested in buying on the (infrequent) up days. Trade in the opposite direction of institutions at your own peril.

In yesterday’s Wagner Daily, we highlighted charts of the Nasdaq Composite and IWM (iShares Russell 2000 Index), both of which were had run into key resistance levels and were poised to resume their existing downtrends. Given yesterday’s action, it appears that both indices are indeed positioned to resume their primary downtrends and will at least test support of their prior lows from last week. In addition, the Dow Jones Industrial Average has also reversed after running into resistance of its prior lows from August and September. The dotted horizontal line on the chart below illustrates this:

Why did the Dow reverse at the 10,350 area? It reversed because the most basic tenet of technical analysis states that a prior support level will always become the new resistance level after the support is broken. Notice how the Dow previously bounced off the 10,350 level on several occasions, but then fell below it on October 5. As such, investors who were trapped when the Dow broke support can now be expected to sell on any rally attempt back up to that level because human nature is for a person to “just break even.” This is how a prior support level becomes the new resistance after the support is broken. DIA, which is the ETF that tracks the Dow, traded below our trigger price listed in yesterday’s Wagner Daily, so Morpheus is now short the Dow based on the pattern above. We anticipate a retest of the October 13 low and possibly more within the next few days. The short re-entry in IWM (iShares Russell 2000) also triggered yesterday and is looking good so far.

We expect the Semiconductor sector to be active today, as sector leader Intel reported its quarterly earnings after yesterday’s close. Although Intel met revenue expectations, they fell short of analyst EPS expectations and was last seen trading significantly lower in the after-hours market. The negative reaction to Intel’s report, along with several other mediocre earnings reports, is also weighing heavily on the overnight futures markets. As of the time of this writing, both the S&P and Nasdaq futures are positioned for a substantial opening gap lower this morning. Beware of high market volatility continuing throughout the week, particularly in the Nasdaq, as Ebay reports tonight and Google presents their numbers after tomorrow’s close. Remember that whether or not a company beats or misses expectations is irrelevant; all that matters to short-term traders is the market’s reaction to the numbers. As always, be sure to trade what you see, not what you think!

Today’s Watchlist:

There are no new plays for today, as two new short entries triggered yesterday (see below for details).

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 63.65

, unrealized P/L = + $80

DIA short (300 shares from Oct. 18 entry) –
shorted 102.89, stop 104.10, target 99.60, unrealized points = + 0.02, unrealized P/L = + $6

Closed positions (since last report):

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

$55,729

Notes:

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