The Wagner Daily | February 24, 2006

Commentary:

For the second consecutive day, the S&P 500 tested resistance of its 52-week high and failed, causing stocks to close lower across the board. Similarly, the Nasdaq Composite probed above resistance of its daily downtrend line yesterday afternoon, but was unable to close above it. Although the small-cap Russell 2000 and Nasdaq Composite each showed 0.5% gains at their intraday highs, both indices finished 0.2% lower. The S&P 500 lost 0.4%, the Dow Jones Industrials 0.6%, and the mid-cap S&P 400 0.3%.

Total volume in the NYSE fell by 3%, while volume in the Nasdaq was 4% lighter than the previous day’s level. The decline in turnover was positive because it indicates institutions were not actively involved in yesterday’s losses. But the lighter turnover also means that volume in both exchanges has come in below their respective 50-day average levels every day this week. If you consider the recent indecisive nature of the market, it is not surprising that volume levels have been so low. When institutions finally do take a stance in one direction or the other, we should expect a swift move in stock prices that will coincide with a volume spike.

The broad market’s price action of the past two days tells us that the major indices are at a “make it or break it” level, the result of which would likely determine the stock market’s direction over the next several months. Most notable is that the S&P 500 has tried to break out to a new 52-week high in each of the past two sessions, but has been unable to do so. The red horizontal line on the daily chart below illustrates this pivotal resistance level:

If the S&P manages to close above the 1,295 level, it will have broken its January high. Such an occurrence could easily spark an extended, momentum-driven rally due to the lack of overhead supply. But if the index does not break out within the next several days, the bulls could “throw in the towel,” which would also attract short sellers. Failure to break out at this pivotal 1,295 resistance level would also result in a bearish “double top” formation. So as you might have guessed, all eyes will certainly be on the S&P 500 over the next few days.

Like the S&P, the Nasdaq Composite also closed just below a pivotal resistance level. As of yesterday afternoon, the Nasdaq was poised to close above resistance of its six-week downtrend line, but it sold off in the final hour of trading. The index finished the session in the middle of its intraday range, forming a “doji star” candlestick in the process:

Based on its close proximity to the downtrend line and the first failed attempt at breaking it, we’re certain that traders will be equally focused on whether or not the Nasdaq can break out. Everything we said about the direction of the S&P at this pivotal level can be said about the Nasdaq as well.

More than any other time this year, the markets are at a crossroads. Obviously, it is risky to be making aggressive bets on either side of the market right now without first getting confirmation of which way the market wants to go from here. Because of this, we are not looking to enter any new positions until the market “makes it or break it.” Remaining mostly in cash will enable us to easily “hop on board” in whichever direction the market goes. Simply following the trend of the market is always easier and much more profitable than anticipating direction at a pivotal level. But above all, remember to trade what you see, not what you think!

Today’s Watchlist:

There are no new setups for today, as we prefer to wait for confirmation of the market’s next move.

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 73.25

unrealized P/L = + $170

MDY short (300 shares from Feb. 21 entry) –
shorted 140.87, stop 142.82, target 133.70, unrealized points = (1.40), unrealized P/L = ($420)

Closed positions (since last report):

net P/L = + $190

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

$57,481

Notes:

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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