The Wagner Daily | November 2, 2005

Commentary:

Despite another quarter-point rate increase by the Feds yesterday, the major indices traded in a tight and narrow range before finishing the day slightly lower. Stocks briefly rallied as a knee-jerk reaction to the announcement of the widely expected rate increase, but the broad market quickly fell back into its prior intraday range. The S&P 500, Nasdaq Composite, and Dow Jones Industrials each closed 0.3% lower. The S&P 400 Midcap Index showed relative strength and was unchanged, but the small cap Russell 2000 Index fell 0.5%. Trading activity in most industry sectors was lethargic and uneventful, but that is likely to change over the next few days after traders have had a chance to digest yesterday’s Fed meeting.

Turnover in yesterday’s session was mixed. Total volume in the NYSE declined by 5%, but volume in the Nasdaq was 1% higher than the previous day’s level. The higher volume losses in the Nasdaq technically made yesterday a “distribution day,” though the session did not really have the feel of heavy institutional selling and the volume increase was nominal. Remember also that the prior two sessions in the Nasdaq were both bullish “accumulation days,” so those days certainly counter-balanced yesterday’s distribution.

As detailed in yesterday’s Wagner Daily, the major indices are now at pivotal support/resistance levels that will “make or break” the direction of the broad market in the month of November. Because stocks traded in a benign fashion yesterday, the support and resistance levels we illustrated yesterday are still valid, so keep an eye on those levels going into today’s session. Of importance, notice that both the Dow Jones and Nasdaq Composite have been stalling at resistance of their 50-day moving averages over the past two days. The downtrend lines overhead provide further resistance. Rather than being redundant and showing the broad market’s key support/resistance levels again, you may wish to review the charts in yesterday’s newsletter instead.

As we mentioned last week, one major drag on the Nasdaq has been the recent performance of the Semiconductor Index ($SOX). The $SOX closed below support of its 200-day moving average on October 27 and has been trading below it ever since. The sector attempted to recover back above its 200-MA on October 31, but it was unable to do so. The Semis are a heavily weighted sector, so the Nasdaq will rarely sustain an upside move without the $SOX leading the way. If you want to know where the Nasdaq is headed, just follow the performance of the $SOX. Unless the $SOX recovers back above its 200-MA, we would be very cautious on the long side of the Nasdaq:

With the daily charts of the major indices showing a lot of indecision near their pivotal support/resistance levels, it is useful to take an updated look at the longer-term weekly charts instead. Although you cannot really base your day to day entry and exit points on the weekly charts, they are useful for removing the “noise” and choppy action that often accompanies daily charts. This, in turn, will enable you to stay focused on the “big picture” of what is really happening instead of getting sucked into the choppy, sloppy action on the daily charts right now.

The daily chart of the Dow shows a steady downtrend since the high of September, but the weekly chart actually shows the Dow in a less-steep downtrend since the high of March 2005. This is a good example of how the weekly chart removes the day-to-day noise and enables you to more clearly see what is really happening:

Unlike the Dow, the Nasdaq has only been in a primary downtrend since the high of August, but the weekly chart shows that the downtrend began with the formation of a bearish double top (the horizontal blue line on the chart below). The one positive is that last month may have marked a “higher low” in the Nasdaq, but the downtrend line (the red line) may be a challenge to overcome:

As you can see, weekly charts help you to maintain a clear and unbiased technical picture when the daily charts show nothing but erratic chop and indecision. We like to use a top-down approach to analysis by first looking at weekly charts in order to see the “big picture,” then drilling down to daily and hourly charts to determine our entry and exit points. If you are presently in any stocks or ETFs and would like to re-affirm whether or not you should still be in them, consider checking out the weekly charts. Again, short-term “swing traders” cannot use weekly charts to identify precision entry and exit points, but they are very useful for making sure your shorter-term analysis is not being over-ridden by the more significant weekly trend.

The market’s performance over the next week is likely to determine its direction for the rest of the month. When the direction becomes clear, we will re-position ourselves on the appropriate side of the market by either buying sectors with relative strength or shorting those with relative weakness. But until that happens, we patiently remain in cash, ready to strike at a moment’s notice.

Today’s Watchlist:

There are no new trade setups for today, but we will send an e-mail alert if/when we enter any new ETFs.

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):

Closed positions (since last report):

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

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