The Wagner Daily | August 23, 2004

Commentary:

The broad market maintained its bullish bias last Friday, as each of the major indices once again registered gains and closed at their highs of the week. After beginning the day with a small opening gap down, the S&P 500, Nasdaq, and Dow Jones each quickly recovered and spent the first half of the day consolidating near their respective highs of the previous day. Buyers subsequently stepped in around 1:00 pm EST and lifted each of the major indices to new intraday highs, which also coincided with new highs for the week. The broad market spent the remainder of the afternoon in a steady uptrend and each of the indices closed the day near their intraday highs. The Nasdaq Composite once again led the way higher, as the index closed with a 1.0% gain. Both the S&P 500 and Dow Jones Industrial Average closed 0.7% higher. Unlike the previous gains of the week in which the broad market rallied on higher volume, volume in both the NYSE and Nasdaq declined by 5% on Friday. Volume also continues to remain below its 50-day average level, although we may begin to gradually see it increase as traders return from their Summer vacations.

Of the broad-based indices, the Russell 2000 Small Cap Index turned in the highest percentage gain on Friday. The Russell 2000, which is considered to be more speculative than other indices, rallied an impressive 1.95%, nearly double the Nasdaq’s 1.0% gain. This worked out great for us because we bought IWM, the ETF that tracks the Russell 2000, when it traded through our trigger price on Friday morning. As of Friday’s close, we have an unrealized gain of nearly 1.5 points on IWM, so we will continue to trail a stop higher as we enter the new week. The recent relative strength in the small caps is interesting because the prior bull market of last year was primary led by the small caps, which often act as a leading indicator.

On a different note, we would like to bring your attention to the Gold and Silver Mining Index ($XAU), which broke out of an 8-month downtrend last week. Like the S&P 500 and Nasdaq, the $XAU index rallied sharply from March 2003 until January 2004, but has spent all of this year in a primary downtrend — until last week. Furthermore, the Gold/Silver Mining Index also closed above its 200-day moving average for the first time since April 12, 2004. The weekly chart of the $XAU index below illustrates last week’s rally and breakout above its primary downtrend line. We have removed the moving averages so that you can more easily see the weekly downtrend line:

Last week’s breakout in the gold/silver mining index also correlated with a breakout in the price of spot gold, which rallied and closed above its prior high of $412 per ounce. Because spot gold has rallied above its prior high, we now expect a retest of this year’s high, just over the $430 level. As spot gold rallies, the gold and silver mining stocks should also move higher. The daily chart below illustrates last week’s breakout in the price of spot gold:

Since the index closed above resistance of a downtrend line that was in place for eight months, we expect to see further upside in the coming weeks. As such, our hedge fund took intermediate-term long positions in NEM, AU, and CDE last week, each of which are showing solid unrealized gains. There is still not a domestic ETF that tracks either the price of gold or gold/silver mining stocks, but you may want to consider building your own ETF by trading a basket of the leading individual stocks in the index. Gold miners to look at: NEM, PDG, ABX, FCX, AU, GFI, GG. Silver miners: CDE, PAAS. Because the index made a huge run last week, you may want to wait for a small correction in the index before entering new positions. The prior downtrend line in the $XAU index should now act as the new support level if the index retraces a bit.

Unlike the Gold/Silver Mining Index, the S&P 500, Nasdaq, and Dow Jones each remain well below resistance of their primary downtrend lines from their January 2004 highs. However, each index closed the week firmly above their prior downtrend lines from their June 30 highs, which we analyzed extensively during the past two weeks. Expect each of the major indices to run into significant resistance as they approach their prior highs of their former downtrend lines, which were set on August 2. The August 2 highs that will provide resistance are as follows: S&P 500 – 1108, Nasdaq Composite – 1893, Dow Jones – 10200. Because the S&P 500 gained 3.2% and the Nasdaq rallied 4.6% last week, it would be perfectly normal to see a small correction this week before the indices rally up to their prior highs, especially given that volume still remains on the low side. However, the sellers also seem to have dried up, at least in the short-term. Therefore, we enter this week with an overall bullish bias, but continue to remain cautious and ready to close our long positions in the blink of an eye. We do, however, anticipate the gold and silver stocks will remain strong due to the break of the weekly downtrend line discussed above.

Today’s watch list:

There are no new trade setups for today, but we remain long IWM and SMH, both with solid unrealized gains.

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:

(none)

Open Positions:

unrealized P/L = + $358

IWM long (from Aug. 20) –
bought 107.66, new stop 106.80, target 110.20, unrealized points = + 1.36, unrealized P/L = + $136

Notes:

We remain long SMH with the same stop and long IWM with a new stop, as per above.

Edited by Deron Wagner,
MTG Founder and
President