The Wagner Daily | December 29, 2004

Commentary:

The broad market brushed off Monday’s losses, as the major indices promptly recovered yesterday. The S&P 500 and Dow Jones Industrials both gained 0.7% yesterday, while the Nasdaq Composite continued to show slight relative strength and closed 1.1% higher. The broad-based gains, which occurred within the first 75 minutes of trading, enabled each of the major indices to erase their losses from the previous day and also close at new three and a half year highs. Total market volume increased by approximately 7% in both the NYSE and Nasdaq, but still came in between 25% to 35% below average levels.

The market action of the past two days is a clear illustration of why we prefer to avoid aggressive trading when the markets are showing lighter than average volume. Because Monday’s losses occurred on such light volume, it did not take a lot of buying interest to reverse the losses yesterday. Similarly, the fact that yesterday’s gains occurred on lighter than average volume means it would only require a minimum amount of selling pressure in order to cause the broad market to drift lower again today. Conversely, trends that occur on higher than average volume levels are generally smoother and less choppy because there are enough market participants to absorb the few traders who take positions on the opposite side of the trend. We maintain a constant focus on broad market volume levels because the higher the overall volume levels, the more likely our trades will follow through and be profitable. The present light volume of the holiday season is the primary reason we have not been targeting any new ETF trade entries during the past week.

Strength in the Internet sector the past two days caused us to stop out of our HHH short position with a 1-point loss yesterday, but the weekly breakout in the Biotech sector has pushed our long position in BBH (Biotech HOLDR) up to a 7-point unrealized gain since our December 9 entry. Our long entry in BBH was initially based on a break of its weekly downtrend line, which occurred during the week of December 6 – 10. Since breaking that downtrend line, which had been in place for eight months, BBH has trended steadily higher for the past four weeks. The weekly chart of BBH below illustrates how well it has been trending since the break of its downtrend line earlier this month:

Our 7-point unrealized gain in BBH is a good example of the power of trailing stops. Without using a trailing stop to maximize profits, it would have been easy to cut our profits too quickly in this position. But a trailing stop enables us to maintain our winning position and ride the profits as long as we are able. When a stock or ETF is in a strong trend, this is a much better way to manage a position than trying to guess or predict where the trend will end. When BBH eventually runs out of gas and begins to correct, our trailing stop will automatically lock in profits. The key, of course, is making sure you are not trailing too tight of a stop that will get triggered on just a minor intraday gyration in the stock’s price. For this reason, we have been trailing a stop that is approximately 2 points lower than each day’s closing price of BBH.

The stock markets are open every day this week, but we expect overall volume and institutional participation to remain lighter than average until the new year. As such, this will make it difficult to determine the validity of any trends that may develop. When the institutional money returns after the new year, its participation will quickly determine the short-term direction of the markets. But, in the interim, we continue to recommend you take a more cautious stance on both sides of the market. In particular, be sure your stops are in place to protect any sudden reversal of trends that may develop, which can easily occur on light volume days.

Today’s watch list:

SMH – Semiconductor HOLDR
Long

Trigger = above 33.17 (above yesterday’s high and 20-day MA)
Target = 35.30 (resistance of 200-week MA)
Stop = 32.42 (below yesterday’s low)

Notes = SMH has been in a volatility contraction that is likely to result in a big move in one direction or the other. A break below $32 would probably result in a big selloff, while a breakout above its 20-day MA should trigger a rally. A break above the 20-day MA would also represent a break of its short-term downtrend line (on the chart above). On the next rally attempt, SMH will probably push through its 200-day MA, but will have resistance of the 200-week MA above that. As always, we will only buy SMH if it trades above its trigger price.

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:

net P/L = + $26

HHH short (from Dec. 20) –
shorted 69.65, covered 70.80, points = (1.15), net P/L = ($234)

Open Positions:

unrealized P/L = + $352

Notes:

Both QQQQ and HHH shorts hit their trailing stops yesterday, but our long position in BBH is now showing an unrealized gain of more than 7 points. We will continue trailing a stop up to our intended target of the $160 area.

Edited by Deron Wagner,
MTG Founder and
President