The Wagner Daily | March 22, 2006

Commentary:

Early gains in the Semiconductor Index ($SOX) sparked a late morning rally in the Nasdaq, but pivotal resistance levels on several of the major indices triggered institutional sell programs in the afternoon. The end result was a smattering of bearish reversals with broad-based losses on higher volume. At mid-day, the Nasdaq Composite was showing a 0.8% gain, but the index finished the day 0.9% lower. Equally negative was the performance in the $SOX index, which saw its 2.4% intraday gain transform into a 0.2% loss. Although it briefly traded at a new all-time high on an intraday basis, the small-cap Russell 2000 later plummeted to a 1.3% loss. The S&P 500 fell 0.6%, the S&P Midcap 400 shed 0.9%, and the Dow Jones Industrial Average lost 0.4%. Each of the major indices closed at their intraday lows, positioning stocks for further downside momentum into today’s open.

Confirming yesterday’s bearish reversals was an increase in total market volume in both exchanges. Volume in the NYSE increased by 11%, while volume in the Nasdaq rose 21% above the previous day’s level. The losses on higher volume caused both the S&P and Nasdaq to register a confirmed “distribution day” that was indicative of institutional selling. It was the fourth “distribution day” within the past four weeks, which is always a warning sign to the bulls. As for internals, declining volume exceeded advancing volume by nearly 3 to 1 in the NYSE and 2 to 1 in the Nasdaq. Although the ratio in the Nasdaq was not horrible, it is important to note that the ratio was positive by nearly 4 to 1 before the afternoon reversal.

If you are wondering what caused the sudden change of sentiment that triggered yesterday afternoon’s avalanche, one of the biggest contributing factors was that several of the major indices ran into very pivotal resistance levels of their previous highs. Most interesting was the Nasdaq Composite, which collapsed after failing to break through resistance of its 5-year high that was set on January 11 of this year. That level of 2,332.9 has clearly become a “line in the sand.” Looking at the daily chart below, notice how the Nasdaq rallied exactly up to resistance of its prior 5-year high before it fell apart in the afternoon:

Curiously, the Dow Jones Industrial Average also reversed after running into resistance of its 5-year high yesterday. This is illustrated on the long-term monthly chart below:

At its intraday high, the S&P 500 had probed above the high of its three-day range of consolidation, but the index finished the session all the way back down at its prior breakout level. As you may recall, 1,295 represented resistance of the S&P’s prior high that it broke out above on March 14. Yesterday’s closing price of 1,297 means that we will soon see whether or not new support of the prior high will hold up. If the S&P fails to go lower, it will be a positive sign that its technical support level is working. However, a slide back below the 1,295 level would not be good because it would indicate a failed breakout to its multi-year high that occurred last week:

Finally, take a look at both the S&P Midcap 400 and Russell 2000 indices, which can be traded through the MDY and IWM exchange traded funds. As you can see, both indices have been unable to break out to new high over the past several weeks:

Yesterday’s bearish reversals that occurred after several of the major indices failed at key resistance levels was a great example of how an index’s prior lows and highs always act as support and resistance levels. It is these fundamental elements of technical analysis that we like the best because they are consistently reliable. Why are prior lows and highs always good predictors of future support and resistance levels? Simply because human psychology never changes. Most people who bought a stock at a higher price will always look to sell when the stock recovers to near the break-even entry price. This, of course, causes resistance to form by creating additional overhead supply. The inverse is true with regard to how support levels are formed.

Going into today, we now expect further downward pressure. A lot of selling momentum was created by the mid-day reversal that trapped the people who bought stocks in the morning breakout. This, in turn, attracted short sellers, many of whom are also likely to show up on the scene today. Therefore, we feel it is imperative to keep tight stops on your long positions in the event of further institutional selling that began yesterday. At present, we do not have any long positions and are already positioned for further downside with three open short positions: IWM (Russell 2000), IGW (iShares Semiconductor), and EWZ (iShares Brazil). As of yesterday’s close, each one is showing an unrealized gain, but a bit of caution is still required on the short side until the S&P 500 closes below 1,295 and the Nasdaq falls below its choppy, sloppy trading range on its daily chart.

Today’s Watchlist:

There are no new trade setups for today, but we now have three open positions.

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 = + $312

IGW short (300 shares from March 16 entry) –
shorted 64.26, stop 66.41, target 59.90, unrealized points = + 0.86, unrealized P/L = + $258

EWZ short (200 shares from March 21 entry) –
shorted 40.53, stop 42.45, target 33.20, unrealized points = + 0.82, unrealized P/L = + $164

Closed positions (since last report):

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

$56,162

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