The Wagner Daily | December 3, 2004

Commentary:

The major indices initially followed up Wednesday’s breakout session with a continuation of the uptrend during the first half of the day, but gave back most of their intraday gains in the afternoon. The Nasdaq Composite was trading 0.8% higher at its intraday peak, but closed the day only 0.2% higher. The S&P 500 and Dow Jones Industrials both closed less than 0.1% lower. Although the major indices gave back much of their morning gains, they actually acted okay considering the extent of the previous day’s gains. It’s probably most accurate to consider yesterday to have been a consolidation day that allowed the broad market to catch its breath for a while.

Total market volume in the NYSE was on par with the previous day’s level, but volume in the Nasdaq came in 9% higher than the previous day’s level. Since the Nasdaq again closed higher and on higher volume, it marked the second consecutive “accumulation day.” Interestingly, the 9% increase in turnover caused the Nasdaq to have its single highest volume day since January 29, 2004, which happened to be a bearish “distribution day.” Advancing volume outpaced declining volume by a ratio of 1.47 to 1 in the Nasdaq, but breadth was negative in the NYSE because declining volume conversely outpaced advancing volume by the same margin. The divergence in breadth was confirmed by the higher close in the Nasdaq, but fractionally lower closing prices in the S&P and Dow.

Although the broad market closed near the flat line, a few individual sectors diverged significantly. The Biotech sector turned in an impressive performance, with BBH (Biotech HOLDR) gaining 2.4% yesterday due to strength in the large cap biotechs like Amgen. The Pharmaceutical sector followed a similar path, as PPH (Pharmaceutical HOLDR) rallied another 1.4% despite a flat S&P and Dow. Since buying PPH on November 30, MTG is now showing an unrealized gain of 2.3% in the position. The Semiconductors initially showed a lot of strength during the first half of the day, but traders sold shares ahead of Intel’s mid-quarter report that was due after the close. In their report, Intel gave a positive outlook, which caused the Semiconductors to rally sharply in after-hours trading. You may want to keep an eye on SMH (Semiconductor HOLDR) today because it will be in play on the long side if its opening gap up remains intact after the first thirty minutes of trading. The key with SMH will be whether or not it can rally and hold above its 200-day moving average, which correlates to the prior high from November. SMH was trading above its 200-day MA in after-hours trading, so it could become the new support level if the gap holds. The red horizontal line on the chart below illustrates the key pivot level to watch in SMH:

In yesterday’s Wagner Daily, we looked at the key resistance level of the January 2004 high in the Nasdaq Composite. Not surprisingly, the prior high of January caused the resistance that triggered the afternoon weakness and reversal in the Nasdaq. It is common for a prior 52-week high to act as resistance on the first breakout attempt, but the Nasdaq is likely to rally and close above that resistance level if it consolidates at its current range for the next several days. The weekly chart of the Nasdaq below illustrates how the prior high put the brakes on today’s rally:

As of the time of this writing, both the S&P and Nasdaq futures are trading above yesterday’s highs, which positions the broad market for a large opening gap up. As always, we recommend using the MTG Opening Gap Rules to manage your positions on the open. To summarize the rule, MTG does not buy opening gap ups UNLESS the stock or ETF rallies to a new high after the first 20 minutes of trading. Without waiting for a new high, you risk being trapped in a failed gap up. However, gaps that subsequently set new highs after the first 20 minutes typically go much higher because they trap the bears.

Today’s watch list:

Due to today’s large opening gap up, we are not listing any new “official” ETF setups for entry. However, we like both SMH (Semiconductors) and IBB (iShares Biotech) for long entry if the gap up holds. We also would consider buying IBB on its first pullback, since it broke out above resistance yesterday. We’ll be looking for a low-risk entry point in these ETFs and will, as always, send an e-mail alert if/when we enter any new ETF positions.

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 = + $161

Notes:

Note the new stop on PPH above.

Edited by Deron Wagner,
MTG Founder and
President