The Wagner Daily | May 26, 2005

Commentary:

The Nasdaq snapped its impressive eight-day winning streak yesterday, but the loss was small and volume declined. The Nasdaq dropped 0.6% yesterday, but the loss was small considering that the index gained 5.0% during the prior eight days. The S&P 500 also declined, but only by 0.3%. The Dow Jones Industrial Average fell 0.4%. Mild buying interest in the early afternoon lifted the broad market off its low and enabled each of the major indices to close in the upper half of their intraday ranges. When the major indices show weakness in the morning but exhibit strength in the afternoon, it is a common trait of a resilient market.

One positive of yesterday’s action is that total volume in the Nasdaq market declined by 11%. This, of course, is what you want to see on a correction day. Remember that five of the last eight “up” days in the Nasdaq have been on higher volume, and it remains bullish that the first “down” day is on lighter volume. Volume in the NYSE actually increased by 2%, but we do not consider this to be very significant considering that the prior two days were the lightest volume days of the year. Despite yesterday’s small price correction, the volume patterns remain firmly bullish.

The Semiconductor Index ($SOX) corrected yesterday as well, but it held above the prior day’s low and closed in the middle of the prior day’s range. This is bullish and presents the possibility that the index will correct more by time (trade sideways) rather than correcting by price (trade lower). Because the index has rallied so much without a correction, a sideways consolidation would be healthy, as it would enable the 10 and 20-day moving averages to rise up and provide price support on the formation of a new base. If a base develops right at resistance of the weekly downtrend line (as we looked at yesterday), it would become a “no-brainer” to buy the next breakout to a new high. We’ll apply patience here and wait to see if a base develops, which would be the most ideal scenario for initiating new positions in the Semis.

On the bearish side, we continue to see relative weakness and sector rotation out of the former market leading sectors, particularly in the energy and utility-related sectors. Taking a look at the daily chart of the Dow Jones Utilities Average ($DJU), it appears the index may be rolling over:

After testing support of its 50-day MA three times within a six-week period, the $DJU broke sharply below its support on May 13 (circled above). It has since attempted to rally back, as indexes often do after their initial breaks of support, but has been unable to get back above its 20-day moving average. This has resulted in the possible formation of a “lower high,” which positions the index to drop back down below its 50-day moving average once again. If it does, we expect, at the very least, a re-test of the May 13 low. For that reason, we remain short UTH (Utilities HOLDR). Just as the $SOX index has been trending steadily lower for the past two years, the $DJU has been trending steadily higher. For that reason, we expect to see continued sector rotation out of the “old economy” sectors like Utilities and into the formerly weak tech-related sectors.

Today’s Watchlist:

There are no new plays for today, although we continue to stalk both SMH and BBH for ideal long entry points. We also remain short UTH from our original May 13 entry. As always, we will send an intraday e-mail alert to Wagner Daily subscribers if/when we enter any new ETF positions intraday.

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 = ($91)

Notes:

No changes today.

Edited by Deron Wagner,
MTG Founder and
President