The Wagner Daily | December 9, 2004

Commentary:

The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each gained 0.5% yesterday, one day after each of those indices sustained their biggest losses in nearly a month. The S&P and Dow recovered half of their losses from the previous day, but the Nasdaq only made up one-third of its prior day’s loss. Total market volume in the Nasdaq came in 12% lighter, but volume in the NYSE was on par with the previous day’s level. Lighter volume on the first “up” day following a high volume “distribution day” is common, and it confirms Tuesday’s sudden shift to a bearish sentiment. Breadth in the broad market was mixed, with the Nasdaq showing the more bearish undertone. Up volume marginally outpaced declining volume in the NYSE, but declining volume outpaced advancing volume by a margin of 1.5 to 1 in the Nasdaq.

We notice an interesting and sudden divergence within individual industry sectors yesterday. While most sectors were trading lower, several sectors related to health care each diverged and closed significantly higher. Specifically, the Biotechnology Index ($BTK) gained an impressive 2.4%, the Pharmaceutical Index ($DRG) gained 0.8%, and the S&P Healthcare Index ($HCX) closed 1.5% higher. Conversely, the Semiconductor Index ($SOX) again showed relative weakness and lost 1.2% yesterday. Although the $SOX index broke above its daily downtrend line five weeks ago, the problem is that it has run into overhead resistance of both its 50 and 200-week moving averages. The 50 and 200-DAY moving averages are always significant points of support or resistance, but those same moving averages on the longer-term weekly chart are even more significant. The weekly chart of the $SOX below illustrates how the index reversed after hitting its 50 and 200-week moving average, which also happened to coincide with the double top on the Nasdaq Composite:

Conversely, the Biotech Index ($BTK) is looking pretty bullish on its weekly chart and is now poised to break out of a consolidation that has lasted three months. If the $BTK index breaks out above its resistance at the 540 level, you may consider buying either BBH (Biotech HOLDR) or IBB (iShares Nasdaq Biotech). The red horizontal line on the weekly chart of $BTK below illustrates the breakout point we are watching:

You may also want to consider re-entering PPH (Pharmaceutical HOLDR), which we just closed on Tuesday. However, between the two sectors, the Biotechs are looking stronger. For those who trade individual stocks, you may want to take a look at Biogen (BIIB), which broke out of a 9-month base to a new 52-week high yesterday. This play was also listed as a trade setup in today’s MTG Stalk Sheet.

As discussed in last week’s live training seminar, ETF Success Secrets, there is commonly an inverse relationship between major sectors that occurs as a result of institutional rotation. Unlike private equities traders, institutions don’t have the luxury of being able to keep their portfolios in cash. Therefore, they are always shifting their funds into the sectors that offer the best risk to reward ratio. Your job as a trader is to track the institutional money flow and simply ride along on their coat tails. When institutions are getting defensive, for example, you will often see money rotate out of the more aggressive, growth-oriented sectors and into the more traditional “defensive” sectors. Two sectors that often have that inverse relationship are the tech stocks and pharmaceutical/biotech stocks. Yesterday’s divergence may be the start of a new trend, so keep a close eye on those sectors. Trading individual sector ETFs, instead of the broad-based ones, is often a great strategy to use when the broad market is giving mixed signals.

Today’s watch list:

BBH – Biotech HOLDR
Long

Trigger = above 146.55 (above yesterday’s high)
Target = 160.20 (just below 52-week high of April 30)
Stop = 141.70 (below the 200-day MA)

Notes = Per the commentary above, we are looking for a breakout in the Biotech index. Note that BBH is quite volatile, so be sure to reduce your position size to compensate for the wider stop and larger price target. See the MTG Position Model for more details.

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 = + $108

Notes:

No changes to the QQQQ stop yet.

Edited by Deron Wagner,
MTG Founder and
President