The Wagner Daily


The major indices wrapped up last week with a dull session on Friday, something we commonly see ahead of extended holiday weekends. The S&P 500 closed 0.1% higher, while the Nasdaq Composite closed 0.1% lower. Major strength in the Pharmaceutical sector, particularly Merck and Pfizer, enabled the Dow Jones Industrials to gain 0.3%. The Amex Pharmaceutical Index ($DRG) ignored the lifeless broad market and powered 2.4% higher. Total market volume in the NYSE came in 2% lighter than the previous day, but volume in the Nasdaq declined sharply by 17%. Considering the index closed slightly negative, the decline in the Nasdaq’s volume could be considered a positive. Market and volume breadth, however, was negative in both the NYSE and Nasdaq.

In the beginning of February, MTG noted we were beginning to see sector rotation into the Semiconductor Index, and industry which had been showing relative weakness to the broad market for more than a year. That relative strength to the broad market remains, but last week’s bullish performance in the Pharmaceuticals ($DRG) also brought a new trade setup to light. Like the Semis, investors and traders have been ignoring the drug stocks for a long time. However, institutional money eventually flows out of the sectors that have been doing well and into the sectors that begin to look like “values.” Apparently, this is now the case with not only the Semis, but also the Pharmaceuticals. Taking a look at a long-term weekly chart of the $DRG, notice how the index closed last week above resistance of its downtrend line that had been in place since the high of February 2004, exactly one year ago:

Although not shown on the weekly chart above, the index also closed above its 200-day moving average last Friday. While a small price correction would be normal given the recent gains, the prior downtrend line on the $DRG should now act as the new support level. As such, we feel that a new trade entry into the corresponding Pharmaceutical HOLDR exchange traded fund (PPH) now offers a good risk-reward ratio. You will see that PPH is a new trade setup listed below.

As our sole open ETF position remains SMH (Semiconductor HOLDR), let’s also take an updated look at the Semiconductor Index ($SOX). Detailed commentary follows the daily chart of the $SOX below:

Since putting in a bottom on January 24, the $SOX has been trending steadily higher and outperforming the broader-based Nasdaq Composite. From February 7 through 10, the index consolidated at resistance of its 200-day moving average, but broke out firmly above it on February 11. A few days later, on February 15, the index attempted to break out above resistance of its 200-week moving average. The 200-week MA, which the $SOX had been trading below for three years, once again acted like a brick wall and quickly stopped the $SOX rally just above the 443 level. Since then, the index has been involved in a “normal” price correction for the past three days.

On the chart above, notice that the $SOX still remains above support of its lower channel uptrend line, which is annotated as the thick blue ascending line. Just below the uptrend line is the 200-day moving average, which should now act as support as well. As long as the $SOX holds above its uptrend line, and especially the 200-day MA, we remain bullish on the intermediate-term outlook of the Semis. However, a closing price below the 419 level would change our bias. On the upside, resistance of the 200-week MA remains at the 442 level. Each subsequent test of a resistance point absorbs overhead supply, and hence decreases the level of resistance. But remember the 200-week MA has been intact for three years, so it may take a bit of work for the $SOX to get through. Because we have a good entry price on SMH, we will continue to trail a relatively loose stop in an attempt to stay with the position through its next rally attempt (likely into the 200-week MA).

Quarterly corporate earnings season is winding down now, which should reduce the degree of the daily volatility the markets have been experiencing lately. The major indices have not been trending well in the short-term, which makes it difficult to swing trade positions for more than a day or two. You can compensate for market volatility by reducing your share size and using looser stops, which still maintains the same dollar amount of risk on each play.

Today’s watch list:

PPH – Pharmaceutical HOLDR

Trigger = buying at market on the open (closed last Friday at 72.07)
Target = 76.75 (just below its high of Sept. 2004)
Stop = 70.40 (just beyond 61.8% Fibo retracement of the breakout)

Notes = See commentary above for explanation of the trade setup.

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, stop 32.25, target 34.90 on HALF, no target on second HALF (will trail stop), unrealized points = + 0.80, unrealized P/L = + $240


No changes to the stop or target today.

Edited by Deron Wagner,
MTG Founder and