The Wagner Daily | November 15, 2004

Commentary:

After breaking out above key resistance points last Thursday, the broad market followed up with another day of solid gains across the board. Thanks to afternoon strength in the Semis, the Nasdaq Composite led the way and closed 1.2% higher last Friday. The index also gained 2.2% for the week. The S&P 500 Index gained 0.9%, while the Dow Jones Industrial Average moved 0.7% higher. For the week, both the S&P and Dow Jones gained 1.5%. Unlike the previous day, higher volume confirmed the gains, as total market volume in the NYSE increased by 10%. Volume in the Nasdaq came in 13% higher than the previous day, and the two billion share day was the highest in several weeks. This means Friday was an institutional “accumulation day” in both exchanges. On another note, Spot Gold closed at a new 16-year high again, just over $438 per ounce. The new Gold ETF is also scheduled to launch in the coming week (finally)!

The most notable thing about Friday’s action was the afternoon strength of the Semiconductor Index ($SOX), which finally closed above its weekly downtrend line and at a four-month high. Last Wednesday’s weakness in the sector was a short-lived shakeout, as the index quickly recovered all its losses during the following two days. The weekly chart of the $SOX below illustrates the close above the primary downtrend line that had been in place for nearly a year:

As we have been discussing extensively, it is quite important that the $SOX break its weekly downtrend line in order for the strength in the Nasdaq to be sustained. Ideally, we would like to have seen the index close well above its downtrend line because it has not yet penetrated the resistance enough in order to confirm the break of downtrend. But, given that the index closed at a four-month high and on strong volume last Friday, we feel odds are good the breakout will hold. As such, we bought back into SMH (Semiconductor HOLDR) on Friday afternoon. We were a few days early on the first attempt, but the risk/reward is very positive now.

The S&P 500 remains at a new multi-year high. Even though it may seem a bit overextended, remember that an index will generally keep going higher as long as there is no overhead supply. That’s why buying a new 52-week high in a bullish market is typically a very profitable trade. The Nasdaq and Dow are still below their prior highs from earlier this year, but they’re both gaining ground quickly. The Nasdaq also closed the week well above the 2,050 area of resistance we have been focused on, so that should now act as support. If you’re long the broad market, just continue to trail those stops higher to protect your profits. But, we feel the best risk/reward for new positions now is not in the broad-based ETFs, but in sectors that are just starting to make their moves. Particularly, we like the charts we’re seeing in the Semiconductor Index now. Keep an eye on Pharmaceuticals too, many of which are starting to form bases for bullish reversal.

Today’s watch list:

There are no new plays for today, although we are now long SMH.

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 = + $118

Notes:

Per intraday e-mail alert, we bought SMH on Friday afternoon and now have a decent profit buffer since our entry point. The IEF short did not trigger on Friday, and we have removed it from our watchlist.

Edited by Deron Wagner,
MTG Founder and
President