The Wagner Daily | January 25, 2006

Commentary:

Yesterday was a repeat of the previous day’s action, as the broad market drifted in a narrow, sideways range before finishing the day modestly higher. One positive difference, however, is that turnover correspondingly rose as well. Both the S&P 500 and Dow Jones Industrials gained 0.2% for the second consecutive day, but this time the Nasdaq Composite turned in a much better performance with a 0.7% advance. Small caps continued to display impressive relative strength, as the Russell 2000 cruised 1.4% higher and closed at a new record high. The mid-cap S&P 400 also outperformed with a 0.9% gain yesterday. Interestingly, small and mid cap stocks were virtually unaffected by last Friday’s sharp drop in the S&P 500, Dow, and Nasdaq, which is the reason we cautioned against shorting IWM or MDY in yesterday’s newsletter.

Total volume in the NYSE increased by 11% yesterday, while volume in the Nasdaq was 8% higher than the previous day’s level. The increase in turnover tells us institutions were nibbling on the buy side, but it would have been better to see larger percentage gains considering the extent of last Friday’s losses. Market internals were also not very strong. Advancing volume in the Nasdaq exceeded declining volume by a narrow margin of only 3 to 2. The key question is whether or not we will see another surge in volume on the next “down” day in the market. Remember how the positive effect of the January 19th “accumulation day” was quickly wiped out by the much higher volume losses the following day.

Over the past two days, both the S&P 500 and Nasdaq Composite have been clinging to life support of their 50-day moving averages. As we are “supposed” to see in primary uptrends, both indices bounced after coming down to support of their 50-day MAs on January 20. But in actuality, the bounces have been pretty lame thus far. The S&P 500, for example, appears to be hanging on the edge of a cliff:

The small retracement of the past two days that followed the January 20 selloff has created a “bear flag” chart pattern. Therefore, if the S&P 500 falls below yesterday’s low, it would provide an ideal short entry in SPY due to a break of both the 50-day moving average and short-term hourly uptrend line. As such, we are stalking SPY for a potential short entry today (regular subscribers can note our trigger, stop, and target prices below).

Looking very similar to the S&P 500 is the daily chart of the Nasdaq Composite:

If interested in shorting the Nasdaq, ONEQ and QQQQ are two ETFs to consider. ONEQ mirrors the price of the Nasdaq Composite, but its low average daily volume sometimes results in wide spreads. QQQQ actually tracks the price of the Nasdaq 100 Index instead of the Nasdaq Composite, but QQQQ is presently showing a similar chart pattern to the Nasdaq Composite. Even better, QQQQ has already been trading below its 50-day MA for the past three days. Shorting SPY or QQQQ below yesterday’s lows presents a positive risk/reward scenario because a tight stop can be kept just above yesterday’s highs.

Overall, both the S&P and Nasdaq are at key pivotal levels and are likely to make a big move in one direction or the other within the next few days. Based on the very bearish action and technical damage of January 20, we feel odds tend to favor a move to the downside, but relative strength in the small and mid cap stocks may pull the market higher instead. Either way, be sure to honor your stops on both sides of the market and trade what you see, not what you think!

Today’s Watchlist:

SPY – S&P 500 Index
Short

Trigger = below 126.26 (below yesterday’s low)
Target = 121.95 (support of 200-day MA)
Stop = 127.37 (above yesterday’s high and 20-day MA)
Shares = 350

Notes = See commentary above for explanation of this setup. Also, our ideal share size for this trade would be 500 shares, but the buying power of the model account only allows 350 shares. Consider adjusting share size if your account equity allows.

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):

unrealized P/L = + $70

RTH short (400 shares from Jan. 23 entry) –
shorted 94.76, stop 96.25, target 89.80, unrealized points = (0.26), unrealized P/L = ($104)

Closed positions (since last report):

net P/L = ($84)

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

$53,378

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