The Wagner Daily


Traders returned from the Christmas holiday in a bullish mood and pushed the S&P 500 Index, Dow Jones Industrial Average, and the Nasdaq Composite to new 52-week highs yesterday. The Dow and S&P 500 both closed 1.2% higher, while the Nasdaq Composite gained 1.7% and closed over the 2000 level for the first time since January 15, 2002. Although it was much higher than the previous two “half days” of trading, volume in both the NYSE and Nasdaq was very light yesterday. In the NYSE, just over 1 billion shares traded hands, which was 20% below the 50-day average volume of 1.29 billion shares. Volume in the Nasdaq was 1.37 billion shares, which was 17% below its 50-day average of 1.66 billion shares. However, despite the low volume, breadth was very positive and indicated sellers were scarce. Advancing volume outpaced declining volume by a margin of 8.4 to 1 in the NYSE and 3.8 to 1 in the Nasdaq.

If volume would have been higher yesterday, we would have been very impressed with the broad market’s performance. But the reality is that we still don’t know how the market will react when the “big money” returns to the market after the New Year’s Day holiday. It’s quite possible that institutions will jump on board and push the markets higher, but it seems even more likely that we will see some selling into strength. When rallies are founded on low volume, it only takes a few big sellers to undo the gains in a very short period of time. That’s why we pay so much attention to analyzing broad market volume every day in this newsletter. It will definitely be interesting to see how things develop as volume begins returning to the markets.

The Semiconductor (SOX) Index, which we pointed out to you in yesterday’s newsletter, broke out above resistance of its 20 and 50-day MA convergence yesterday. As such, this also enabled the Nasdaq to close at a new 52-week high. The chart below illustrates the break out above the 500 level in the SOX:

We bought SMH when the SOX index broke out yesterday and took it overnight with a small profit buffer. As you will see in the “Daily Reality Report” below, we have also raised our stop to breakeven. We anticipate further gains in the SOX in the coming days, but are cautious due to the light volume of the broad market.

Yesterday’s strength in the Semis also enabled QQQ to finally break out and close above its resistance of 36.18. Even though volume was light, it’s not surprising that QQQ closed at a new high because it was the fifth attempt at breaking out. Remember that each failed breakout attempt in an index absorbs price resistance, which makes the odds of finally breaking out that much greater on the next attempt. After forming a quadruple top on the daily chart, there was minimal overhead supply to hold QQQ down when it broke out to a new high yesterday. If the breakout holds, the prior resistance from 36.00 to 36.18 area should now become the new support level. The daily chart of QQQ below illustrates the break out and new anticipated support level:

The daily chart of DIA (Dow Jones Industrial Average) is quite bullish and shows only a short correction by time with virtually no recent price retracements. If looking back only over the past year, DIA shows no overhead price resistance. However, it’s very important to follow longer-term weekly and monthly charts, in addition to daily charts, when looking for key support or resistance levels. If you look at a weekly chart of DIA, you will notice a very important downtrend line that DIA is fast approaching. This downtrend line began with the high of January 2000 and intersects with the high of May 2001. The weekly chart of DIA below illustrates this:

As you can see, the primary weekly downtrend line in DIA converges just over the $105 level, about 50 cents higher than where DIA closed yesterday. This equates to approximately 10,500 on the Dow Jones. Therefore, we expect the Dow to soon encounter strong resistance of this downtrend line that has been in place for nearly four years. But, since we are looking at a longer-term weekly chart, this does NOT mean that the Dow will instantly drop lower after testing the resistance. Instead, it’s quite possible the index will initially pierce through the resistance, sell off, test the level again, fail, then maybe drop lower. In other words, remember that you are looking at a weekly time frame and it could take an entire month or so until Dow corrects significantly at its downtrend line. We are not showing you the weekly resistance on the Dow to suggest an immediate short in DIA, but rather to make you aware that the risk/reward of being long at current prices is probably not that good, unless you are just daytrading. Even though the Dow may go another 100 or 200 points higher from here, odds are good that it will fall several times that amount within the next month or two.

Finally, we want to let you know that we took profits on the remaining shares of PDG (a gold mining stock) in the Intraday Real Time Room yesterday. The Gold Index ($GOX) is now 7% higher than when we first mentioned its reversal off the 50-day MA in the December 24 issue of The Wagner Daily. We also have seen a huge run in some individual nanotech stocks that we have been discussing in the Real-Time Room over the past few days. For the sake of brevity, we won’t get into detail about nanotechnology, but you may want to research the area and its associated stocks. NGEN, TINY, NANX, and ALTI are among those stocks in the sector that have made gigantic percentage gains over the past two days. There is not an ETF that tracks this sector, but perhaps some of you stock traders may be interested. Remember the markets are closed for New Year’s Day on Thursday.

Today’s watch list:

There are no new “official” trade setups going into today, but we are watching the following and may enter if conditions are right:

We are watching EWJ (Japan Fund) for a possible long entry over 9.50, but we want to see how the broad market performs first. We are also watching OIH (Oil Service HOLDR) for a possible breakout after forming a bullish pennant, but it is a bit overextended away from its 20-day MA, making it a bad risk/reward at this level. Finally, PPH (Pharmaceutical HOLDR) closed over its resistance on the daily chart and may also extend gains today. As always, we will send an intraday e-mail alert when/if we enter any new positions today. For now, we remain long SMH from yesterday’s entry.

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:

    DIA short (from Dec. 23) –
    shorted 103.64, covered 103.84, points = (0.20), net P/L = ($44)

Open Positions:

    SMH long (from Dec. 29) –
    bought 41.50, new stop at 41.50, unrealized points = + 0.30, unrealized P/L = + $90


We bought SMH when it triggered yesterday and have raised the stop to break-even going into today. We also stopped out of DIA with a small loss.

Edited by
Deron Wagner,
Founder and President