The Wagner Daily


The expectation that Bush would win the Presidential election yesterday caused the broad market to gap open sharply higher, but the excitement faded and the major indices drifted lower throughout the day. Nevertheless, the market still turned out some decent broad-based gains. Despite weakness in the Semiconductor Index ($SOX), which actually lost 1.0%, the Nasdaq gained another 1.0% yesterday. The Nasdaq has been turning in quite a consistent performance lately, as the index has closed higher on six of the last seven days. The S&P 500 Index and Dow Jones Industrial Average both followed suit and gained 1.1% and 1.0% respectively. Volume in both the NYSE and Nasdaq was 6% higher than the previous day’s levels, which means that yesterday was a bullish “accumulation day.”

One thing we found interesting about yesterday’s session was the divergent weakness in the Semiconductor Index. Most industry sectors in both the S&P and Nasdaq acted pretty well yesterday, which resulted in each of the major indices closing with the same approximate percentage gain. But the $SOX index closed 1.0% lower, while each of the major indices closed 1.0% higher. It’s not unusual to have one or two industry sectors diverge from the broad market on any given day, but it is a bit unusual for the $SOX to be one of those sectors. Due to its heavy weighting, the $SOX index typically leads the direction of the Nasdaq, which often leads the S&P 500. Yesterday, however, was one exception because the Nasdaq still managed to lock in a 1% gain, despite the 1% loss in the Semis. A closer look reveals this was due to strength in the Biotech Index ($BTK), another important sector, which closed 3.6% higher. The weakness in the Semis, but strength in the Biotechs, was indicative of institutional sector rotation. However, the reason we found this surprising was due to the bullish pattern that had been forming on both the daily and weekly charts of the $SOX.

Going into yesterday, the $SOX was forming a multi-day bullish consolidation at its prior highs. When this occurs, a large opening gap above the consolidation usually leads to further gains and a strong close near the intraday high. The opening gap up happened, but the $SOX immediately sold off and trended lower throughout the day, which means that the index had a failed breakout yesterday. The daily chart of the $SOX below illustrates the prior bullish consolidation, but yesterday’s failed breakout attempt:

If you look at the longer-term weekly chart of the $SOX, it may become apparent why the index had trouble following through to the upside after yesterday’s opening gap up. The $SOX, which has been in a technical downtrend since the beginning of 2004, tested resistance of its weekly downtrend line yesterday morning. Traders subsequently decided it was a good time to sell into the strength, most likely due to the resistance of the downtrend line. The weekly chart below illustrates this:

Once again, notice the importance of looking at multiple chart time frames of the same index. A quick look at only the daily chart of the $SOX would have looked quite bullish going into yesterday. But, upon looking at the longer-term trend, it would have become apparent that the index may have had some trouble going much higher. Our long position in SMH (Semiconductor HOLDR) hit its trailing stop when it gapped up and dropped below the low of the first 20 minutes. Using the MTG Opening Gap Rules worked perfectly in this case because it enabled us to lock in profits before SMH gave back all its gains later in the day.

Since the low of October 25, the S&P 500 Index has surged 4.9% higher, the Nasdaq has gained 5.1%, and the Dow Jones Industrial Average has advanced 4.4%. The broad market has obviously turned in some impressive gains during the past two weeks. Most likely, much of the rally was the result of anticipation of a Bush victory. However, now that this has happened, the excitement has faded and the broad market may be ready to take a rest. As we have pointed out over the past few days, both the S&P and Nasdaq are holding above their weekly downtrend lines, which means our bias remains bullish in the intermediate term. But the short-term is likely to see a bit of a correction, either in the form of a price retracement or a sideways correction by time. If you’ve been sitting on long positions during the market’s recent rally, this may be a good time to tighten your stops in order to protect any gains. If you are not already long, this is probably not the most ideal time to buy. Instead, consider using any correction in the broad market as a lower-risk opportunity to buy. As for shorting, there may be a few opportunities out there if you’re quick to take profits, but we would not recommend being aggressive on the short side.

Today’s watch list:

PPH – Pharmaceutical HOLDR

Trigger = above 70.55
(above yesterday’s close)
Target = 72.90 (resistance of the prior high from October)

Stop = 69.45 (below yesterday’s close)

Notes = The Pharmaceuticals broke out above their prior highs yesterday, despite a very weak close the day before. We believe this will act as a “bear trap” that should give the index enough strength to rally up to its prior high. Note we are not bullish on this index because it is in a downtrend, but are simply looking to play a bounce on the long side.

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:

    SMH long (from Oct. 28) –
    bought 32.29, sold 32.79, points = + 0.50, net P/L = + $144

Open Positions:


SMH hit our trailing stop yesterday, which was 10 cents below the low of first 20 minutes. While it was disappointing that SMH did not hold its gap, the MTG Gap Rules enabled us to lock in a profit on the trade.

Edited by Deron Wagner,
MTG Founder and