The Wagner Daily | March 18, 2005

Commentary:

After two consecutive days of institutional selling, the broad market attempted to bounce yesterday, but all the major indices managed to do was trade sideways and close nearly flat instead. The S&P 500 Index eked out a 0.2% gain, but the Dow Jones Industrial Average lost 0.1%. The Nasdaq Composite was unchanged. Total market volume in the NYSE came in approximately 4% lighter, while volume in the Nasdaq was 10% lower than the previous day. It was an uneventful day overall and certainly not the kind of action the bulls want to see after the string of higher volume losses over the past week.

From a technical basis, yesterday’s session did little to change the short-term outlook. Though the S&P bounced modestly, it remains four points below its 50-day moving average that it fell below the previous day. Yesterday’s fractional loss in the Dow left the index forty-eight points below its 50-day MA as well. Above their respective 50-day MAs, remember that both the S&P and Dow also have the new resistance created from the recent break of their prior daily uptrend lines.

In yesterday’s Wagner Daily, we pointed out how the Semiconductor Index ($SOX) had dropped down to support of both its 50 and 200-day moving averages. The $SOX subsequently attempted to bounce off support of that convergence yesterday, but it only closed 0.2% higher. The $SOX showed relative strength all throughout yesterday and never dropped into negative territory, but a weak broad market and bearish sentiment kept any kind of decent advance in check. Regardless, we still feel that a long position in SMH (Semiconductor HOLDR) at its current price level provides a good risk/reward. This means that the amount you need to risk on the trade if it goes against you is much less than the potential profit if the trade works in your favor. Because of the convergence of the 50 and 200-day MA in the $SOX, you can place a tight stop in SMH (or any individual semiconductor stocks) just below its low of this week. If it breaks below that level, you’re out quickly and with a small loss. But if the $SOX rallies from here, a distinct possibility, you are positioned long at a very good price basis that affords substantial upside potential. The one caveat, however, is that a weak overall market sentiment is likely to continue putting pressure on the Semis, which is why we did not call SMH as an “official” trade setup yesterday. This is one that is probably best left for advanced traders only.

Hopefully you have also been following the weakness in the U.S. Home Construction Index ($DJUSHB), as we initially pointed it out to you in the March 16 issue of The Wagner Daily. On March 10, the index dropped down to support of its 50-day moving average, where it subsequently tried to bounce off it for the next four days. Instead, the index only managed to trade sideways and consolidate near its lows of that range until it finally broke down and closed below its 50-day MA. The daily chart of $DJUSHB below illustrates the bearish consolidation at the lows of the range and eventual break below the 50-day MA:

As you can see, yesterday was the first time since October 25 that the index closed below its 50-day moving average, which obviously tells us sentiment may be quickly changing in this sector that has been so strong. Again, there is not an ETF that tracks the index, but you may wish to short a basket of the leading individual stocks within the sector instead. Our hedge fund remains short RYL, KBH, and LEN, each showing a nice unrealized profit as of yesterday’s close. Others in the sector to consider are: DHI, TOL, PHM, BZH, and CTX. When determining which stock(s) to short, the ones that are already trading below their 50-day moving averages would be showing the most relative weakness and would therefore be the lower risk plays.

As for the broad market, our overall thoughts have not changed. We continue to feel the major indices are now entering from a sideways trend into a downward one. As such, we view any significant bounce in the broad market as an opportunity to initiate new short positions in the weakest sectors and indices.

Today’s watch list:

There are no new “official” trade setups for today, although we remain short IWM. Advanced traders may wish to consider buying SMH here (with a tight stop), but it is not an “official” trade setup due to its higher risk.

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 = + $61

Notes:

No change to the stop on IWM.

Edited by Deron Wagner,
MTG Founder and
President