The Wagner Daily


The major indices closed the week on a positive note, as the Semiconductor Index led the Nasdaq to close 1.1% higher last Friday. The S&P 500 also turned in a solid performance and moved 0.7% higher, but the Dow Jones lagged behind with a 0.4% gain. Higher volume also confirmed the day’s gains, as total market volume in both the NYSE and Nasdaq came in 3% higher than the previous day’s levels. The solid gains on higher volume made last Friday a confirmed “accumulation day” across the board.

As you know, our biggest focus of analysis during the past week has been on the performance of the Semiconductor Index ($SOX). Because the Semiconductor stocks are so heavily weighted within the Nasdaq, the $SOX often acts as a leading indicator for the entire broad market. That is is why we have been spending so much time analyzing its recent relative strength, which began when the index rallied more than 4% to a new high of the calendar year on February 4. In anticipation of upside follow-through, we entered a long position in SMH (Semiconductor HOLDR) the following day. On February 8, the $SOX broke out above the “brick wall” 200-day moving average, but fell back below it the following day. The next day, the index closed right at the 200-day moving average as if it was a magnet, which meant the action of the next several days would be a “make it or break it” point for the $SOX. Based on the “higher low” on the daily chart and the relative strength of individual stocks within the index, we anticipated the $SOX would “make it” rather than “break it,” which is exactly what happened last Friday. The index did find some resistance, however, when it ran into the highs from December 2004. The daily chart below illustrates how the $SOX is now firmly above its 200-day moving average, which should now become the new support level on any retracement. The prior highs from December are illustrated by the red horizontal line:

Friday’s strength in the Semis put the $SOX within striking range of its 200-WEEK moving average, which the index has been trading below for three years! Since the beginning of 2004, there have been numerous attempts to break the 200-week MA, but the last time the index actually had a weekly close above the 200-week MA was all the way back in March of 2002. The weekly chart below illustrates this:

Needless to say, all eyes will be on the $SOX in the coming weeks because a breakout above the 200-week moving average would be extremely bullish for the Semis. In technical analysis, the longer a moving average has acted as support or resistance, the more powerful the move will be when the index or stock breaks that moving average. In this case, we are looking at a potential break above a moving average that has acted as resistance for three years, so you can be certain a confirmed rally above the 200-week MA would attract many new buyers, as well as force the long-term shorts to close their positions. Because we bought SMH immediately after noticing its initial relative strength, we now have a 4% unrealized gain on the position. However, we will continue to trail a loose stop because we feel the move could become much greater if we are patient enough.

After breaking out above its 50-day moving average on February 4, the S&P 500 Index dropped back down to its 50-day MA on Feb. 9 and 10, but the index held firm and found support there. The subsequent rally on February 11 put the index at a new closing high for 2005, although the index has not yet fully recovered the intraday loss from January 3. Last Friday’s closing price of 1,205 puts the S&P 500 only nine points below its 52-week closing high of 1,213. If the $SOX maintains its strength, it will probably pull the S&P along with it, so keep an eye on that key resistance level as we enter this week. It’s not likely to be easily broken, but will be quite bullish if it is. The red horizontal line on the chart below illustrates the resistance level at just above 1,213:

The Dow Jones Industrial Average has a similar chart pattern, so watch its 52-week at the 10,855 area:

Weakness in the Internets has been holding down the Nasdaq Composite, which remains well below its 52-week high and is still below even its 50-day moving average. Odds are good, however, that a breakout of the 200-week MA in the $SOX will quickly enable the Nasdaq to catch up to the other indices:

Happy Valentine’s Day to everyone (a friendly reminder to our male subscribers) 😉

Today’s watch list:

There are no new setups today, although we remain long SMH (with a 4% unrealized gain now).

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:


Open Positions:

    SMH long (from Feb. 7) –
    bought 32.55, new stop 32.25, target 34.90 on HALF, no target on second HALF (will trail stop), unrealized points = + 1.38, unrealized P/L = + $414


We have raised the stop on SMH and have also changed its target. We now plan on selling only HALF of the position at the 34.90 target, and will keep the second half of the position open with a trailing stop.

Edited by Deron Wagner,
MTG Founder and