The Wagner Daily | December 16, 2004

Commentary:

The broad market sold off during the first two hours of yesterday’s session, but the major indices spent the remainder of the day crawling back to the flat line. The S&P 500 Index finished the day 0.2% higher, while both the Dow Jones Industrials and Nasdaq Composite barely closed positive with a gain of 0.1%. Small caps outperformed the rest of the broad market, as the Russell 2000 Small Cap Index gained 0.7%. Total market volume in the NYSE increased by 10%, while volume in the Nasdaq was 6% higher than the previous day. Though the major indices barely closed higher, it was technically the second consecutive “accumulation day,” meaning the major indices closed higher AND on higher volume. It is important to note, however, that much of yesterday’s volume increase occurred during the morning selloff, which is bearish.

Like yesterday, both the S&P and Nasdaq closed at new 52-week highs, but the Dow again closed below its resistance from the beginning of the year. The Nasdaq Composite closed at 2,162, which was two points shy of its intraday highs from two weeks ago. Therefore, the 2,164 remains an important area of resistance to watch in the Nasdaq. Overall, the percentage changes in the broad market were so small that nothing technically changed on the daily and weekly charts of the major indices. However, as anticipated, there has been some interesting action within individual industry sectors.

In yesterday’s newsletter, we spoke about the recent shift to relative strength in the Pharmaceutical Index ($DRG). The new trend continued yesterday, as the $DRG gained 0.8% while the S&P only moved 0.2% higher. More importantly, the $DRG closed above the horizontal price resistance at 310, which was clearly evident on the daily chart of the index:

The most basic tenet of technical analysis is that prior resistance becomes the new support once the resistance is broken. As such, we expect the 310 area to act as support on any minor correction in the $DRG. If you look at a weekly chart, you will notice that the Pharmaceutical Index also closed just above resistance of its weekly downtrend line, which has been in place since February. The break above the horizontal price resistance of 310, combined with the break of the weekly downtrend line, should result in significantly higher prices in the $DRG index over the next several weeks. We are ready to capitalize on any further upside movement with our long position in PPH (Pharmaceutical HOLDR), which we bought on December 9.

The Semiconductor Index ($SOX) also gained slightly more than the major broad-based indices, and is now forced to either push through resistance of its 200-day moving average or fall back and resume its prior downtrend. Based on the relative strength the index has suddenly begun showing, we feel the index will break out above its 200-day MA. Notice how the index closed right below its 200-day MA today:

We continue to feel that you have better odds of a profitable trade by focusing on individual sector ETFs that are showing strength or weakness to the broad market rather than trading the broad-based ETFs. We’re still short a half position of QQQQ due to resistance of its highs from two weeks ago, but our main focus is on individual sectors such as the Pharmaceuticals.

Today’s watch list:

Since we currently have three open positions, there are no new trade setups for today. We remain long PPH and BBH, and short 1/2 position QQQQ.

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 = + $129

BBH long (from Dec. 9) –
bought 146.60, stop 141.70, target 160.20, unrealized points = (0.95), unrealized P/L = ($95)

QQQQ short (HALF position, from Dec. 7) –
shorted 40.09, stop 40.68, target 37.80, unrealized points = (0.24), unrealized P/L = ($48)

Notes:

Note the new stop on PPH, while we have the same stop on both QQQQ and BBH.

Edited by Deron Wagner,
MTG Founder and
President