The Wagner Daily | June 30, 2006

Commentary:

The Feds raised interest rates by a quarter-point yesterday, but comments that implied a potential end of the rate hikes sparked a monstrous rally across the board. Stocks trended higher throughout the morning, in anticipation of the announcement, then surged much higher in the final ninety minutes of trading. A reversal in the Semiconductor Index helped the Nasdaq Composite zoom to a 3.0% gain. Small caps fared even better, as the Russell 2000 rocketed 3.8%. The other indices kept pace with the gains as well. The S&P 500 advanced 2.2%, the Dow Jones Industrials 2.0%, and the S&P Midcap 400 2.9%. Each of the major indices finished at their intraday highs, indicating the return of institutional buying.

The most important thing about yesterday’s rally is that volume finally came into the markets as well. Total volume in the NYSE spiked 26% higher, while volume in the Nasdaq was 36% higher than the previous day’s level. It was positive that turnover in both exchanges also rose above 50-day average levels for the first time in nine sessions. Market internals were extremely bullish, no doubt aided by broad-based short covering. In the NYSE, advancing volume trounced declining volume by nearly 13 to 1. The Nasdaq internals were equally impressive with a ratio of 10 to 1.

As we warned about a few days ago, the positive reaction to the FOMC meeting invalidated the bearish technical chart patterns in the major indices. This is the reason we have avoided entering new short positions over the past week, despite generally bearish action. Yesterday’s rally resulted in both the S&P 500 and Nasdaq Composite firmly busting out above their seven-week downtrend lines, which forced short covering that generated further upside momentum. Those prior downtrend lines should now act as new support levels, so all bets on the short side of the market are now off, at least in the short-term. The major indices remain well off their 52-week highs and have a lot of overhead supply, but momentum from yesterday’s breakouts should enable both the S&P and Nasdaq to at least test the next resistance of their prior highs from June 2. The red dashed horizontal lines on the daily charts below mark those resistance levels:

Historically, the initial knee-jerk reactions from Fed days have often proven to be false and the following days often result in a move in the opposite direction. However, yesterday’s rally was so powerful that the move is unlikely to quickly come undone. Still, it is something to keep in the back of your mind.

Our intermediate-term bias still remains bearish unless the indices confirm their strength by rallying back above their prior highs from June 2. However, we are now bullish on the short-term. Momentum should enable many sectors to achieve at least another week or two of gains. We are focusing on the ETFs that were showing the most relative strength before yesterday’s rally. Stocks and ETFs that don’t drop when the market does are usually the first to surge higher when the market eventually rallies. A good example of this is the iShares Xinhua China 25 Index (FXI), which we pointed as having relative strength a few days ago. It rallied 4.3% on strong volume yesterday, nearly double the percentage gain of the S&P 500. Presently, we remain long both the Telecom HOLDR (TTH) and the StreetTRACKS Gold Trust (GLD), both of which registered solid gains yesterday. Regular subscribers will see the trigger, stop, and target price for another sector ETF we are stalking for potential long entry today.

NOTE REGARDING HOLIDAY HOURS: In celebration of Independence Day on July 4, the U.S. equities markets will close at 1:00 pm EDT on Monday, July 3. The markets will be closed all day on Tuesday, July 4. The Wagner Daily will be published as usual on Monday, but will not be published on Tuesday. Regular publication will resume on Wednesday, July 5. Enjoy the holiday!

Today’s Watchlist:

IYR – Dow Jones U.S. Real Estate Index
Long

Trigger = above 71.32 (over yesterday’s high)
Target = 74.90 (just below resistance of the 52-week high)
Stop = 69.62 (below yesterday’s low and the 20 and 50-day MAs)
Shares = 400

Notes = IYR was showing relative strength before yesterday’s rally and has now broken out above resistance of its multi-month downtrend line. It is also one of the few sector ETFs in which the weekly uptrend is still intact. IYR initially attempted to break out above its dowtrend line on June 5, but it failed to close above it that day. Conversely, it closed at its highs yesterday and well above its downtrend line. Assuming yesterday’s breakout holds, there is a good chance IYR will make a run for its prior 52-week high over the next one to two weeks. The buy trigger is more than 30 cents above yesterday’s high, which should confirm that yesterday’s breakout will hold.

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 28.74

unrealized P/L = + $420

GLD long (250 shares from June 21 entry) –
bought 58.61, stop 56.71, target 63.40, unrealized points = + 0.91, unrealized P/L = + $228

Closed positions (since last report):

net P/L = ($735)

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

$35,663

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