The Wagner Daily | March 20, 2006

Commentary:

Stocks wrapped up a positive week with a quiet session of sideways trading action last Friday. Both the S&P 500 and Dow Jones Industrials managed nominal 0.2% gains, but the S&P traded in a narrow range of only five points. The Nasdaq Composite, S&P Midcap 400, and small-cap Russell 2000 indices each closed 0.3% higher. For the week, the S&P 500 and Nasdaq Composite each rallied two percent. The S&P also closed at a fresh five-year high on its weekly chart, while the Dow set its highest weekly close since May of 2001.

Turnover surged across the board last Friday, but much of the rise was likely attributed to “quadruple witching” options expiration day. Total volume in the NYSE increased by 21%, while volume in the Nasdaq was 10% higher than the previous day’s level. Technically, the increase in turnover gave both exchanges a bullish “accumulation day,” but higher volume during a session of sideways consolidation is actually negative. When such action occurs after an extended rally, it usually indicates churning that is indicative of institutional selling into strength. More importantly, Friday’s volume surge was largely skewed by the simultaneous expiration of both monthly and quarterly stock and futures options contracts. This “quadruple witching” usually results in a large increase in volume, as institutions are forced to close out various stock positions that correspond to their options positions.

Because the S&P has closed higher for six consecutive days and the Nasdaq continues to weigh on the broad market, a minimum of a short-term correction within the next day or two is very likely. For short-term traders, it is helpful to know where to expect the key support levels to be. For swing traders who enter positions with an intended time frame of several days to a week, the hourly intraday chart is an ideal interval for determining where the major support and resistance levels are located.

On the hourly chart of the S&P 500 below, the 20-period moving average (brown line) correlates to support of an uptrend line that has formed from the March 10 low. If the S&P holds above that 20-MA, it could continue rallying to new highs for a while longer before correcting. However, a break of the 20-MA would likely cause the S&P to fall to the 1,297 area. That level, which is marked by the blue horizontal line, represents support from the prior high of March 3, as well as the price consolidation of March 14 and 15:

Unlike the S&P 500, which has virtually no overhead resistance, the Nasdaq Composite ran into resistance of its March 3 high last week. As you can see on the chart below, the Nasdaq was unable to penetrate the 2,325 level on March 15, which led to a selloff in the afternoon. Going into this week, that 2,325 level obviously is a key area to watch. On the downside, price support should be found at the 2,279 area:

In the bigger picture, the overall theme remains the same as it was throughout last week. The S&P and Dow continue to act well, but weakness in the heavily weighted Semiconductor Index ($SOX) is holding the Nasdaq down. With the Nasdaq showing such relative weakness, it is not likely that the S&P and Dow can sustain their rallies much longer unless the Nasdaq gets in gear. Obviously, that will only happen if $SOX reverses its bearish course. Over the next several days, we will take an updated look at which sectors and ETFs are showing the best chart patterns for short and long entries, but we first want to see the extent of the broad market’s retracement when it begins to correct. Until then, consider tightening stops on any long positions in order to protect your profits in the face of a weak Nasdaq.

Today’s Watchlist:

There are no new trade setups for today, although we have our eyes on a few possible entries that are dependent on market conditions. As always, we will send an intraday e-mail alert if/when we enter any new positions today. In particular, we are considering EWJ long over $14, as well as a short or two IF the major indices break their two-day lows.

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 = + $294

Closed positions (since last report):

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

$18,984

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