The Wagner Daily | December 1, 2003

Commentary:

Last Friday’s holiday-shortened trading session left the major indices virtually unchanged. Not surprisingly, total market volume was extremely light not only due to early closing time, but also because many major market players were absent from the market. MDY (S&P Mid-Cap Index) and IWM (Russell 2000 Small Cap Index) once again closed at new 52-week highs for the second day in a row, although the gains were very minor. SPY (S&P 500 Index) is nearing a new 52-week high, but DIA (Dow Jones Industrial Avg.) and QQQ (Nasdaq 100 Index) both continue to lag. November was basically a consolidation month as each of the major indices closed at least fractionally higher after bouncing off their 50-day moving averages for the fourth time since the primary uptrend began in March.

The most notable thing about Friday’s session was that the CBOE Gold Index ($GOX.X) once again rallied to close at a new 52-week high, as the price of gold traded over the closely-watched $400 per ounce level. This year’s huge rally in gold stocks has left many traders scratching their heads because it is unusual to see simultaneous strength in Gold stocks, which are generally considered defensive, and growth stocks within the Internet, Semiconductor, and other technology-related sectors. We have a few theories of our own, but the bottom line is that the reason for Gold’s strength simply does not matter. All that matters are the technicals, such as chart patterns, which will always reflect whatever is fundamentally happening underneath the surface. Below is a weekly chart of the CBOE Gold Index that illustrates how smoothly this index has been uptrending since the first quarter of the year:

Looking at the chart above, notice that the index closes at its upper channel resistance of the primary uptrend line last week. This means that it will probably correct down to the lower channel support, which is presently just below $85. Consider taking profits on any gold stocks you are long and re-buy at a lower price after it corrects. As we have mentioned before, there is not presently an ETF that tracks the price of gold or gold stocks, which is why MTG has not made any “official” trade entries into this sector. We’ve been hearing about the upcoming release of a new gold ETF for several months, but still do not have a projected launch date for GLD, which will be the ticker for the new gold ETF. If you wish to trade gold in the interim, you may wish to create your own synthetic ETF by trading a small basket of the leading gold stocks such as NEM, PDG, ABX, and GFI. There are many other gold stocks as well, but trading small size of the three or four leaders of the sector is a good way to achieve a similar safety of diversification that ETFs offer.

Although we remain quite bullish on the prospects of Asia over the next several years, we made the decision to take profits on our EWJ position last Friday, based purely on technical analysis. As you may recall, we bought EWJ (Japan Fund) when it sold off down to support of both its primary uptrend line and its 20-week moving average in mid-November. Immediately after buying EWJ, we were “in the money” because it bounced perfectly off its support level. However, after making a 3.3% gain through last Friday, it ran into resistance of the upper channel of its downtrend from the October highs, as well as resistance of its 20-day moving average. The daily chart of EWJ below illustrates this convergence of resistance:

Because of the resistance illustrated above, we made the decision to take a 3.3% profit on the position rather than hoping that EWJ breaks through resistance. However, we will be closely watching EWJ this week and fully intend to re-buy either on a pullback to the lower channel of its primary uptrend (around 8.75) OR on a confirmed break above 9.05. Either one is fine, but we just deemed it more prudent to take gains and look for a lower-risk re-entry point on the position. Of the two scenarios, a confirmed break above 9.05 would be more bullish than a pullback to trendline support because it would put EWJ back above its 20-day MA and downtrend line from the October high. We will be stalking EWJ and will send an e-mail alert if/when we re-enter the position in an attempt to catch the next major leg up.

There is news today that the Bush Administration plans to drop steel tariffs in order to avoid a global trade war. This will likely be interpreted by the markets as a positive factor because it has served as an element of fear over the past several weeks. The futures are up in the pre-market and perhaps this news will act as the impetus that enables the major indices to break out of November’s consolidation. We’ll have a much better idea after we see how the market reacts to the first thirty minutes of trading and whether or not the opening futures gap remains intact. Note that the Dow is nearing a huge psychological resistance level of 10,000 and the Nasdaq Composite is knocking on 2,000. If either of those levels are hit, you can be sure we will see a huge surge in volume because many institutions undoubtedly have large stop orders just over these big round numbers.

In our opinion, December will be an important month because it will determine whether or not the major indices have enough momentum to once again break to new 52-week highs and resume the uptrend. As we discussed a few weeks ago, the length of time between each subsequent test of the 50-day moving average has been declining. In addition, the percentage gain of the broad market, as measured from the bounces off the 50-day moving average up to the peak of the subsequent high, has been declining as well. These two factors may be forming a “rounding top” formation in the major indices, although we do not yet have confirmation of this because the broad market is technically still in a primary uptrend. We’ve begun to “dip a toe in the water” on the short side with a partial short position in QQQ, which we initiated on November 26 after detecting the formation of a head and shoulders chart pattern on its daily chart (reference the November 28 Wagner Daily for details). So, we enter the new month with eyes wide open and ready for anything to happen, but continue to feel there is no reason to be aggressive on EITHER side of the market right now. As long as the market remains in a consolidation pattern, your best odds lay in putting most of your cash on the sidelines until the market shows its next major move. Patient traders who wait for the right opportunities are consistently the most profitable traders.

Today’s watch list:

PPH – Pharmaceutical HOLDR
Long

Trigger = above 74.87
(above Friday’s high, hourly downtrend line, and multiple moving average resistance levels)
Target = 77.40 (retest of prior highs)
Stop =
74.25 (below Friday’s low)

Notes = PPH was a setup from last Friday, but it did not trigger. We still like this setup and have adjusted the buy stop trigger as per above. Trade now has an even better risk/reward ratio if it triggers. The Pharmaceutical Index has corrected through a 50% retracement of its most recent rally, which we profited from in
mid-November. We anticipate that PPH will now begin to head higher to test its prior high
at 77.50 area. We will buy on a break above last Friday’s high at 74.87 or higher.

Remember you can
track the price of PPH by following its index, which is $IPH.X. You trade PPH,
but track the price of its index for more accurate pricing without the wide
spread. Always use limit orders when trading PPH due to its wide spread.

RTH – Retail HOLDR
Short

Trigger = below 92.80
(below 20-day MA)
Target = 85.50 (predicted drop based on distance from neckline at 90 to head at 95)
Stop =
95.10 (above the high of the head at new 52-week high)

Notes = The Retail Index has formed a perfect head and shoulders on the daily chart, so we will look to short RTH once it breaks below its 20-day MA, which will have confirmed the rollover from the right shoulder. This may not trigger today, but we want to be prepared if it does.

Remember you can track the price of RTH by following its index, which is $IRH.X. You trade RTH,
but track the price of its index for more accurate pricing without the wide
spread. Always use limit orders when trading RTH due to its wide spread.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG
Position Sizing Model.

Closed Positions:

net
P/L = + $104

Open Positions:

unrealized P/L = +
$39

QQQ short (1/2 position from Nov. 26) –
shorted 34.95, stop at 36.20, target 31.50, unrealized points = (0.43), unrealized P/L =
($86)

Notes:

We sold the EWJ position on Friday (see earlier commentary above), but remained long half position OIH and short half position QQQ over the weekend. We are short QQQ based on the head and shoulders pattern that was discussed in the November 28 issue of The Wagner Daily. There are no changes to the stops on either open position. The PPH setup from last Friday did not trigger.

Edited by Deron Wagner,
MTG Founder and President