The Wagner Daily | January 4, 2007

Commentary:

Yesterday was a wild session filled with volatile, whipsaw moves in both directions that left the major indices with mixed results. The Nasdaq Composite, with a maximum intraday gain of 1.7% and loss of 0.9%, closed 0.3% higher. Both the S&P 500 and Dow Jones Industrial Average were equally as indecisive, but closed with a loss of 0.1% and a gain of 0.1% respectively. The small-cap Russell 2000 was unchanged, while the S&P Midcap 400 Index advanced 0.4%. If you missed the intraday trading action and only saw the final closing figures in the news, you might have assumed yesterday was a relatively uneventful day, but it certainly wasn’t! Instead, it was an erratic, high momentum tug-of-war between the bulls and bears. Since each of the major indices finished in the bottom half of their intraday ranges, the bears slightly had the upper hand in the end, but not overwhelmingly.

As one might expect, the conclusion of the holiday season and the four-day weekend caused volume to rocket higher across the board. In the NYSE, total volume was a whopping 102% higher than last Friday’s level! Total volume in the Nasdaq surged 88% higher. The NYSE saw its highest volume since September 15, the “quadruple witching” options expiration day for the third quarter of last year. Nasdaq volume was also way above average. The mixed closing prices in the S&P and Nasdaq technically caused the former to register a bearish “distribution day” and the latter a bullish “accumulation day.” However, the extreme intraday volatility made it difficult to confirm either scenario. In the morning, advancing volume in the Nasdaq exceeded declining volume by a margin of more than 6 to 1, but the ratio was only positive by less than 2 to 1 at the close. Conversely, the NYSE finished with a negative volume spread of 1.2 to 1. Both institutional buying and selling was at play throughout the day, but the trend of the market internals indicated more overall selling than buying.

In yesterday’s newsletter, we noted how both the S&P and Nasdaq were entering the new year at pivotal “make it or break it” levels. Specifically, we mentioned that the stock market’s direction over the next month would primarily depend on which scenario occurred first — a break below the indices’ key support levels we illustrated or a breakout above equally important resistance levels. To our surprise, the major indices did both yesterday! In the S&P 500, we pointed out that the November 27 high of 1,427 was the resistance level to watch, while the 20-day MA at 1,416, and especially the December 22 low of 1,410, were key support levels. As you can see by the long “wicks” or “tails” on yesterday’s candlestick, the range of the S&P exceeded both extremes yesterday, but settled near the middle of its range:

In the Nasdaq Composite, we highlighted the December 29 high of 2,437 as being a pivotal resistance level because a rally above that area would also put the index back above its 20-day MA. Conversely, we anticipated a break below support of the 50-day MA at the 2,410 area would lead to a rapid break below the December 26 low. Like the S&P, the Nasdaq managed to trigger both those support and resistance levels in yesterday’s session before closing in “no man’s land.” Take a look:

Yesterday’s candlestick patterns in both the S&P and Nasdaq consisted of a narrow body, but with long “wicks” or “tails” on both sides of the body. This type of pattern is known as a “long-legged doji” candlestick and it indicates the market was very indecisive. For this type of pattern to form, the stock or index must have traded well above and below the opening price level, but close the session near that opening price. Basically, the bulls and bears battled it out, but no clear winner emerged in the end.

Commodities, especially crude oil, experienced significant weakness yesterday. Spot gold dropped sharply, but our trailing stop strategy still enabled us to lock in a gain of more than 1.5 points on our GLD position. We also registered a gain of nearly 3.5 points when the afternoon slide in the Nasdaq 100 Index caused our long position in the UltraShort QQQ ProShares (QID) to hit its dividend-adjusted profit target. We still remain long the UltraShort S&P Midcap ProShares (MZZ), which has been hovering near the flat line since our entry point. We also bought a new position in the UltraShort S&P 500 ProShares (SDS) when the S&P broke below its primary uptrend line yesterday. The market’s recovery in the last hour of trading caused SDS to move 50 cents against us, but we still like the trade as long as the S&P does not break out above yesterday’s high.

Going into today, new support and resistance in the S&P and Nasdaq will simply be equal to yesterday’s lows and highs in both indices. Support for the S&P is at 1,407, while resistance of the high is at 1,429. For the Nasdaq Composite, those levels are 2,394 and 2,454. As long as both indices stay within those price ranges, be careful out there because it’s bound to be choppy!

Fortunately, the type of trading action we experienced yesterday is relatively uncommon, but the bad news is that such conditions can result in rapid losses to your trading account if you lack discipline. Obviously, nobody knows how long it will take for the market to resolve itself in one direction or the other, so it is imperative that you take steps to protect yourself from substantial losses in such a whippy environment. We suggest reducing your share size on all new positions and also using mechanical stop orders if you have trouble pulling the trigger and cutting your losses in volatile markets.

Today’s Watchlist:

Due to the current amount of indecision in the markets, there are no new setups in the pre-market today. As always, we will send an intraday e-mail alert if/when we enter any new positions. New position in SDS was entered yesterday, via e-mail alert.

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):

See important notes below regarding this position

unrealized P/L = ($93)

SDS long (400 shares from Jan. 3 entry) – bought 58.90, stop 57.13, target 61.95, unrealized points = (0.50), unrealized P/L = ($200)

Closed positions (since last report):

net P/L = + $1,190

GLD long (400 shares from Dec. 19 entry) –
bought 61.25, sold 62.89 (avg.), points = + 1.64, net P/L = + $648

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

$38,823

Notes:

Per intraday e-mail alert, we sold half of GLD on the open, and the rest later hit the trailing stop of 62.08. Average sell price is reflected above. We also bought SDS and the new trade details are listed above. QID hit its dividend adjusted price target.

MZZ traded “ex-dividend” on December 20. As such, its price was adjusted lower to account for the dividend payment that was made to shareholders on December 27. The net result is no change in the overall profit or loss of the position, but stop and target prices had to be adjusted lower by the exact amount of the dividend distributions. The adjustment was $1.14 per share. Note that the “Unrealized points” and “unrealized P/L” figures already account for the dividend distributions that will be made. New guidelines will soon be put into place to simplify future occurrences of dividend and/or capital gain distributions for ETF positions. See the December 21 issue of The Wagner Daily for a thorough discussion of ETF dividend distributions.

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Edited by Deron Wagner,
MTG Founder and
Head Trader