The Wagner Daily


The major indices spent most of the day in a tight sideways consolidation pattern, digesting the previous day’s gains. An upward push during the final hour of trading lifted the broad market into positive territory, but volume dropped off significantly. The S&P 500 Index gained another 0.5%, the Nasdaq Composite moved 0.6% higher, and the Dow Jones Industrial Average managed to tack on another 0.3%. Continued strength in the Semiconductor sector enabled the Nasdaq to achieve its fifth consecutive day of gains.

As we often see on the day following a high volume breakout, total market volume in both exchanges declined yesterday. Volume in the Nasdaq dropped off by 13%, while turnover in the NYSE came in 22% lighter than the previous day. It is, of course, better to see higher volume on an “up” day, but it’s common to have a slight drop in turnover following a day like Wednesday.

More impressive than the recent gains in the Nasdaq is the new leadership in the Semiconductor Index ($SOX). Since May 10, the sector has logged a 6.5% gain and seven consecutive days of gains. According to our research, the last time the $SOX had seven consecutive days of gains was back in April of 2003, more than two years ago! This, however, is not surprising because the $SOX has clearly been lagging behind the broad market since the beginning of 2004. To illustrate how weak the $SOX has been relative to the broad market, take a look at the weekly chart below. The chart shows the performance (on a relative percentage basis) of both the Semiconductor Index (the blue line) and the S&P 500 Index (the red line) from the beginning of 2004 through the end of April 2005:

As you can see, the S&P 500 Index gained just over 4% during the sixteen-month period illustrated on the chart above, but the Semiconductor Index lost more than 23% during that same period! However, every weak sector eventually reverses and it now appears that institutions are moving money back into the Semis. Below is the same overlay of the $SOX and $SPX, but only showing the relative performance since the beginning of the current month:

Obviously, the tide is turning for the Semis and, as such, you may want to consider buying SMH (Semiconductor HOLDR) or individual Semiconductor stocks on the first correction in the index. But how do we know if the new strength in the Semis is sustainable or just a short-term bounce? The answer lies in the weekly chart of the $SOX, which clearly shows a major area of resistance at the 429 level. The weekly chart below illustrates this:

Since the beginning of 2004, the $SOX has attempted to rally above its 200-week moving average on FIVE separate occasions, but failed each time. The index is once again approaching that major resistance level of its 200-week MA, which is currently at 429. Interestingly, the 429 level also perfectly converges with resistance of the primary downtrend line (the red descending line). Will the $SOX actually break out on its weekly chart this time? Nobody knows for certain, but the double bottom on the weekly chart, combined with the strong momentum we are seeing in the index, gives us reason to believe the rally in the Semis may be for real. If the $SOX does break out above the 429 level, it will provide solid swing trading opportunities on the long side of that sector.

Today’s Watchlist:

There are no new plays for today, although we will be looking for long positions on the first minor correction in the Nasdaq. SMH looking good for long entry on a pullback.

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:

    UTH short (from May 13) –
    shorted 103.64, stop 105.60, target 99.10, unrealized points = (1.20), unrealized P/L = ($120)


No changes today.

Edited by Deron Wagner,
MTG Founder and