The Wagner Daily | November 17, 2004

Commentary:

The major indices each began the day with an opening gap down yesterday morning, but found support and traded sideways after the first hour of trading. The broad market failed to recover its opening losses, but the inability of the market to continue lower throughout the day was once again a sign of resilience. Both the S&P 500 Index and Nasdaq Composite lost 0.7% yesterday, while the Dow closed 0.6% lower. Volume in the NYSE came in 6% lower than the previous day, which confirmed the lack of heavy institutional distribution during yesterday’s correction. Total market volume in the Nasdaq, however, increased fractionally by less than 1%.

As expected, the Semiconductor Index ($SOX), which lost only 0.4% yesterday, continued to show relative strength to the broad market. The break of the weekly downtrend that occurred last Friday has been the impetus for its newfound relative strength. This means the index is losing less than the broad market on the “down” days, and is also gaining a higher percentage than the broad market on the “up” days. Furthermore, the prior resistance of the weekly downtrend line in the $SOX should now act as the new support level on any retracement. Therefore, we are quite comfortable remaining long our position in SMH (Semiconductor HOLDR), which now has an unrealized gain of nearly 3% since buying it three days ago. Take a look at the longer-term weekly chart of SMH:

On the chart above, notice that SMH actually broke out above its weekly downtrend a full week before the $SOX index, which only closed above its weekly downtrend line for the first time last week. This is because the weightings of the individual stocks that comprise SMH are different than the percentage weightings of the $SOX index (check out holdrs.com for a detailed breakdown of SMH). Back to the chart. . .notice how last week’s retracement in SMH found support at its prior downtrend line, as prior resistance becomes the new support once the resistance is broken. The prior downtrend line has also converged with the 20-week moving average, which also will act as support. As for the next major resistance level, that would be the convergence of the 50 and 200-week moving averages at the $36.30 area. If we are able to maintain our current position in SMH until it reaches that level, it would result in a solid 11% gain since our entry. But, SMH is likely to first encounter resistance at the $35.20 area, which represents the 200-day moving average (not shown on the weekly chart above).

Spot gold and the gold mining stocks also continued their recent strength, as spot gold once again closed at a new 16-year high around the $440 area. This has resulted in strong breakouts of many gold and silver mining stocks. Per our trade entry that was listed in the MTG Stalk Sheet, we remain long Anglogold (AU), which just broke out of a multi-month base three days ago. For ETF traders, the great news is that the highly anticipated and long awaited ETF that tracks the price of gold is finally expected to launch very soon. We don’t have an exact date yet, but we have heard it may begin trading as soon as next week. Its ticker will be “GLD” and it will actually mirror the price of spot gold instead of the gold mining companies. This will be the first ETF to track a major commodity, so it should be well-received. We at MTG will be adding it to the list of ETFs that we regularly follow and trade.

Though the major indices each closed lower yesterday, it was a healthy and much needed correction. Prior to yesterday, the Nasdaq Composite had only closed lower during two of the past fifteen sessions. Of those thirteen sessions in which the Nasdaq closed higher, it did so on higher volume during six of them. Therefore, the price to volume relationship of the broad market remains bullish and the daily and weekly charts continue to give every indication that being long is the right side to be on. This does not mean, of course, that there will not be corrections along the way. However, we view any pullbacks in the broad market as a chance to enter new long positions rather than an opportunity to sell short. Remember the most basic rule of technical analysis. . . “the trend is your friend.”

Today’s watch list:

There are no new plays for today, although we remain long SMH and PPH.

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 = + $264

PPH long (from Nov. 15) –
bought 69.75, stop 68.90, target 71.65, unrealized points = (0.01), unrealized P/L = ($1)

Notes:

Note the new stop on SMH above. No changes to PPH position.

Edited by Deron Wagner,
MTG Founder and
President