The Wagner Daily | February 25, 2005

Commentary:

As anticipated, Wednesday’s bounce off the 200-day MA enabled the Semiconductor Index to follow through to the upside yesterday, leading the Nasdaq Composite to close 1% higher. Continued strength in the Metal Mining and Basic Materials sectors enabled the S&P 500 to gain a respectable 0.8%. The Dow Jones followed suit and moved 0.7% higher. Each of the major indices closed at their intraday highs, which is bullish and typically leads to further gains the following morning. An 8% increase in total market volume of the Nasdaq yesterday was positive and also helped confirm the rally. Volume in the NYSE also came in higher than the previous day, but only by 1%. Because of the higher closing prices and corresponding higher volume, yesterday was a bullish “accumulation day,” one of only several we have seen in the Nasdaq so far this year.

In yesterday morning’s Wagner Daily, we discussed the likelihood of the Semiconductor Index ($SOX) rallying firmly off support of its daily uptrend line and 200-day moving average, which it bounced off of the previous day. To our appreciation, that is exactly what happened in yesterday’s session, as the $SOX gained a solid 2.4% and closed at its intraday high. The Semiconductor HOLDR, which we have been long since February 7, also bounced off its 200-day MA and similarly gained 2.1%. Higher volume on many individual stocks within the $SOX also was a positive sign for the sector. Based on yesterday’s action, we now anticipate the $SOX will at least rally up to test resistance of its prior closing high of 439, which was set on February 15. We have circled this prior high on the daily chart of the $SOX below:

More importantly than the February 15 high, remember that the $SOX is also hovering just below resistance of its 200-week moving average, which it has been trading below for three years. Needless to say, a weekly close above this level would be quite bullish and would likely force all remaining traders and institutions to cover any remaining short positions in the $SOX. The relative strength of the Semis, combined with the first “higher low” on the weekly chart, causes us to believe the $SOX will finally break out above its 200-week MA on its next attempt. As such, we intend to continue holding our long position in SMH in order to capitalize on a potentially large percentage gain. Those of you who also trade individual stocks may want to take a look at the leading companies within that sector. In the Morpheus Capital hedge fund, we are currently holding long positions in INTC, TXN, NSM, LRCX, IDTI, and FSL, but there are many more worthy of consideration. Just as a visual reminder, take a look at the proximity of the $SOX to its 200-week moving average. Although not shown in the chart below, the last weekly close above the 200-week MA was all the way back in March of 2002:

As for the broad-based indices, yesterday’s rally put both the S&P 500 and Dow Jones Industrial Average firmly back above their 50-day moving averages, which they only remained below for one day. Their prior highs from mid-February are likely to act as significant resistance, but the 50-day moving averages below are proving to be the new support. The prior highs to watch closely over the next few days are: 1,210 – 1,212 for the S&P 500 and 10,835 to 10,853 for the Dow. Support of their 50-day moving averages are at 1,193 and 10,655. We suggest you make note of these support and resistance levels and use them to assist your trading operations over the next several days to a week.

Unlike the S&P and Dow, the Nasdaq is still not looking too good on its daily chart. Specifically, it will now have to contend with resistance of its prior daily uptrend line, which it broke below on February 22. Remember that prior support becomes the new resistance after the support is broken, so it will probably require a surge in volume and broad strength in the Nasdaq in order for the index to get back above its prior uptrend line, which is illustrated on the weekly chart below (all moving averages were removed so you can more easily see the trendline):

Today’s watch list:

There are no new trade setups for today, although we remain long both SMH and PPH.

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 = + $363

PPH long (from Feb. 22) –
bought 72.19, new stop 70.65, target 76.75, unrealized points = (0.26), unrealized P/L = ($26)

Notes:

Note the new stop on PPH.

Edited by Deron Wagner,
MTG Founder and
President