The Wagner Daily


Resistance of the prior highs on the S&P and Dow caused both indices to sell off yesterday, while sharp losses in the Biotech sector weighed down the Nasdaq. After failing to sustain enough momentum to break out above their prior highs from early February and last December, both the S&P 500 and Dow Jones Industrial Average fell victim to selling pressure and closed 0.6% and 0.7% lower respectively. The Nasdaq Composite similarly lost 0.7%, which wasn’t too bad considering the 5.5% loss in the Biotech Index ($BTK). Despite yesterday’s losses, the S&P 500 finished the month of February with a solid 1.9% gain. The Dow Jones showed the most relative strength and moved 2.6% higher for the month. The laggard Nasdaq Composite lost another 0.5% in February, which brought its total 2005 loss to 5.7%.

Total market volume came in sharply higher yesterday, giving the major indices another bearish “distribution day.” Volume in the NYSE was 18% higher than the previous day, while volume in the Nasdaq registered a 20% increase. Obviously, such an increase in turnover on a day of broad-based selling is not what the bulls want to see. However, it is interesting to note that yesterday’s huge volume surge in Biogen Idec single handedly accounted for one third of the Nasdaq’s 340 million share volume increase.

One positive of yesterday’s session was that the major indices closed roughly in the middle of their intraday ranges, as opposed to closing at their lows. Buyers stepped in around 2:00 pm EST and lifted the S&P, Dow, and Nasdaq off their lows and correspondingly halved the broad market’s earlier losses. Given the extent of the S&P and Dow’s February gains, yesterday’s broad market correction should not have come as a great surprise. In the Feb. 28 newsletter, we showed you the overhead resistance that both the S&P and Dow were up against. With three consecutive days of gains in the latter half of last week, the prior highs provided a convenient excuse for a correction in both indices. Similarly, the Semiconductor Index needed to take a rest as well. As we discussed yesterday, a one week sideways consolidation in the $SOX would be healthy because it would allow the Semis to form a new base of price support. Without it, any further rally in the Semis is likely to be short-lived.

Speaking of Semis, the $SOX gapped higher on yesterday’s open and rallied for the first thirty minutes, but profit taking set in shortly thereafter. Nevertheless, the early gains pushed SMH (Semiconductor HOLDR) up to its initial price target we had set for HALF of the position. As such, we closed half of our long position in SMH for a 7.3% gain and still remain long the second half of the position with a trailing stop. The initial price target of SMH was based on resistance of the prior high on its daily chart. Notice how SMH reversed after testing its prior high:

Yesterday’s action in the Biotechnology sector was a great reminder of how exchange traded funds can often provide you with much lower risk than individual stocks. Leading Biotech firm Biogen Idec (BIIB) withdrew its well-known multiple sclerosis drug after a patient in their clinical studies died. The news destroyed Biogen’s partner company, Elan (ELN), which closed a whopping 70% lower! Shares of BIIB fared only slightly better, closing “only” 43% lower. However, due to the diversification of stocks that inherently comprise every ETF, shares of BBH (Biotech HOLDR) sustained a relatively moderate loss of 6.5%. Although a 6.5% loss would not be much fun, it sure as heck beats a 43% or 70% overnight loss! On the flip side, you will rarely capture a huge overnight gap to the upside if a company had good news, but the more important factor of long-term success is always capital preservation. If a trader loses his/her capital, nothing else matters. This is why MTG strives for hitting singles and generating consistent, profitable monthly returns rather than swinging for the homeruns. In trading, the homerun hitter always has more risk of completely striking out and ending the game. ETFs are a great way to focus on consistently hitting singles and significantly reducing your risk of striking out.

Today’s watch list:

There are no new trade setups for today, but we remain long both SMH and PPH. As noted above, we sold half our position in SMH for more than a 7% gain, but are still holding the remaining half of the position.

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:

    SMH long (HALF position, from Feb. 7) –
    bought 32.55, sold 34.91, points = + 2.36, net P/L = + $351

Open Positions:

    SMH long (HALF position, from Feb. 7) –
    bought 32.55, stop 33.20, no target (trailing a stop), unrealized points = + 1.44, unrealized P/L = + $216

    PPH long (from Feb. 22) –
    bought 72.19, stop 71.10, target 76.75, unrealized points = (0.35), unrealized P/L = ($35)


We sold half of SMH yesterday when it traded through its target price, but we remain long half position.

Edited by Deron Wagner,
MTG Founder and